Hungary's GDP Contracts as Industrial Slump Outweighs Services Growth

Hungary's economy unexpectedly shrank in the first quarter as industrial weakness offset service sector gains, highlighting vulnerabilities in the export-dependent nation.

Gross domestic product fell 0.2% from the previous quarter and remained flat year-on-year, the Budapest-based statistics office reported. The figures fell short of economists' expectations, with Bloomberg's survey having projected 0.4% growth for both metrics.

The disappointing data presents a significant political challenge for Prime Minister Viktor Orbán ahead of next year's elections. The opposition Tisza party has gained momentum in polls by focusing on Hungary's cost-of-living crisis. Orbán, who had promised voters a "flying start" to 2025 following last year's recession, has been forced to scale back growth forecasts.

In response to the GDP report, the Economy Ministry blamed the European Union, claiming the bloc was prioritizing aid to Ukraine over supporting member states. However, Orsolya Nyeste, economist at Erste Group Bank, offered a different assessment.

"The erratic performance of the economy — Hungary has been in a recession every other year since the pandemic — is evidence of weak fundamentals and structural problems," Nyeste stated. "The latest data don't even include the potential negative effects of the trade war."

Economy Minister Márton Nagy warned that the emerging global trade tensions create significant downside risks for Hungary, with the country's direct and indirect U.S. exposure estimated at approximately $11 billion. Nagy recently rejected U.S. pressure to reduce Hungary's growing economic ties with China.

Just last month, the government revised its annual growth forecast downward to 2.5% — a target that analysts now view as increasingly unrealistic, with some predicting expansion below 2%.

Facing pressure to stimulate growth, Orbán has announced several pre-election tax measures, including expanded income tax exemptions for mothers and VAT rebates for pensioners. These initiatives have forced the abandonment of budget targets for both this year and next.

Earlier this month, S&P Global Ratings downgraded Hungary's credit outlook to negative, warning that Orbán was jeopardizing economic stability by increasing spending ahead of elections.

Hungarian officials have also pointed to Germany's economic difficulties as a factor in their industrial slump. In its preliminary report, the statistics office noted only that industry and construction had negatively impacted growth, counteracting positive contributions from the services sector.