Hungary’s economy has now moved beyond a usual economic slowdown.
Inflation has come down from its record highs but still sits above comfort levels. Growth has flatlined. Borrowing costs are punishing.
And the news gets worse for the current regime, as a new opposition movement is now ahead in the polls for the first time in more than a decade.
Viktor Orbán built his political machine on the promise of stability and rising living standards.
But when this political machine stops working, maybe it’s time for a change.
A model built in good times now works against itself
Orbán’s second time in office began in 2010, and that’s when his economic model started taking effect.
He rejected austerity and raised revenue from foreign-owned banks and utilities.
The government nationalised private pensions, and the central bank later pushed out cheap credit under György Matolcsy.
Utility price caps became a permanent policy. Public money flowed to domestic firms through subsidies and special lending schemes.
These moves helped Hungary exit the post-2008 slump and gave the government room to campaign on “economic sovereignty”.
The model relied on three pillars. Cheap money made it easy for the government to run expansionary budgets.
EU funds and foreign manufacturers ensured stable investment. A new domestic business class formed around state contracts and government-linked banks.
This network became a core part of the administration’s political structure. As long as growth was steady and inflation low, the weaknesses of this system stayed out of view.
That changed after the inflation shock of 2022 and 2023, when Hungary recorded the highest price increases in the EU.
Year-on-year inflation peaked near 25%. Food prices rose much faster.
The central bank lifted interest rates to a twenty-year high. Real wages fell, and households lost spending power.
Source: FT
The government tried to soften the blow through tax breaks and bonuses, but the scale of inflation made this difficult.
Corruption scandals added to public frustration. They also highlighted how much public money flowed through politically protected channels with little oversight.
The inflation hit that revealed deeper problems
Hungary entered the inflation shock with structural weaknesses already in place. EU funds worth around €20 billion remain frozen over rule-of-law concerns.
Investors have grown wary of sudden taxes and changing regulations.
This has pushed up Hungary’s borrowing costs. The yield on ten-year bonds has stayed close to 7% for a year.
Debt service costs climbed to about 5% of GDP, the highest in the EU.
These are difficult numbers for a country with slow growth.
The budget deficit reached 4.9% of GDP in 2024 and is expected to increase.
Hungary has spent heavily on programmes that do not lift productivity, while health, education, and research have received less focus.
This mix worked during years of cheap credit, but now limits the country’s ability to recover.
Growth has stalled and is weaker than in neighbouring Central European economies.
Many companies are delaying investment because the economic environment feels uncertain.
Hungary’s current position is a mix of subdued growth, elevated inflation, and a fiscal path that is difficult to manage.
Scandals at foundations linked to the central bank made the picture worse.
These foundations received more than €800 million for public objectives but invested in art and high-end properties.
Auditors reported that they were close to insolvency and might need another one billion euros.
Investigations into the lifestyle of well-connected business figures went viral online.
These stories reinforced the sense that the economic model had become more about insiders than about broad-based progress.
EU funds, investment delays and a rising opposition
Hungary’s relationship with Brussels now plays an important role in the economy.
The European Commission has tried to tie the release of suspended funds to judicial and anti-corruption reforms.
The government argues that the conditions are political.
Either way, the absence of this money slows investment.
For a mid-sized economy, the gap is significant. Analysts note that Hungary spends more than 10% of GDP on domestic development programmes, roughly double the OECD average, and many of these programmes are closely tied to politically connected firms.
Public services show the effects. Hospitals face shortages. Schools struggle with outdated facilities.
These problems are not new, but feel sharper when real wages fall and inflation stays high.
The combination has helped Péter Magyar’s Tisza party move ahead of Fidesz in some polls.
His goal is to restore the rule of law, reduce corruption, and repair relations with the EU. This would unlock funds and lower borrowing costs.
His rise suggests that voters see the link between political choices and economic outcomes more clearly than before.
Orbán’s geopolitical bet brings relief but not a reset
The return of Donald Trump to the White House added another twist. The US imposed sanctions on major Russian energy companies and threatened to target buyers.
Hungary still relies heavily on Russian energy and warned that sanctions could push up prices and inflation.
Orbán used his personal relationship with Trump to secure an exemption.
Hungarian officials said it was open-ended. Trump’s team said it would last a year. Even if temporary, it removes the risk of a sudden spike in energy costs before next year’s election.
Orbán also agreed to support US energy investments, including several billion dollars’ worth of liquefied natural gas and small modular reactors.
But whether Hungary can afford the larger commitments is a different question.
These projects look more political than financial.
Orbán then suggested that Trump might help shield Hungary’s economy if markets turn against it.
This language echoed US statements about supporting Argentina’s peso before its midterms.
Hungary’s situation is different because its currency has strengthened. The pressure is in the budget, not the exchange rate.
The energy waiver gives short-term relief but does not change the broader picture. Hungary remains out of step with both the EU and the US on China.
It continues to position itself as a key partner for Chinese electric vehicle makers, battery producers, and telecoms firms.
Trump’s administration has warned European partners to cut links with China.
The EU is moving toward a tougher approach to Chinese overcapacity. Hungary is trying to maintain its ties to both sides, but this strategy carries risks.
A difficult path without an easy fix
Hungary is not in crisis in the traditional sense. The banks are stable, and unemployment remains low. The problem lies elsewhere.
The growth model that worked in the early 2010s has stalled.
Borrowing is expensive. Inflation has left a mark on living standards. Public investment is constrained by the loss of EU funds.
Confidence among private investors is low. And the government is relying on fiscal tools that are less effective than they once were.
A waiver from US sanctions helps avoid an energy shock, but it cannot repair strained EU relations or solve the fiscal pressures created by a decade of heavy spending.
A change in leadership would not produce a quick turnaround either. Dismantling parts of the current economic system could hit firms that depend on the state.
Keeping the system as it is would limit the recovery of investor trust. Hungary has to go through a complex transition no matter who wins the next election.
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