Hungary Politics February 2017

Hungary

Hungary: Economic matters take a secondary role in Hungary's upcoming general election

March 2, 2018

Citizens are headed to the polls on 8 April for a general election that will see the ruling Fidesz party and controversial Prime Minister Viktor Orbán put to test. Orbán, who has ruled uninterruptedly since 2008, is up for a third consecutive term as party leader. In his tenure as prime minister, he has concentrated power by rewriting the constitution and appointing close associates to key posts, including in the Central Bank. His policies and nationalistic rhetoric have put him at odds with the European Union, in particular when it comes to immigration and settlement of refugees. He has secured a solid base at home, however, through economic populism. The most recent opinion polls put his party ahead in the upcoming elections, with a comfortable lead over the far-right Jobbik party and the Socialists. Nevertheless, an electoral upset in late February—in which Fidesz lost a regional by-election—suggests the race could be tighter than initially anticipated.

Although Orbán enjoys a high level of support for the ruling Fidesz-led coalition government, thanks in part to strong economic growth in the past few years, it remains to be seen if Fidesz and its coalition partner will be able to retain the two-thirds legislative majority they now hold. Fidesz was defeated in a regional election on 25 February, in a city where it had ruled since 1990. While there is a possibility of a hung parliament, this would not likely impact the country's economic course, at least in the short-term. It would mostly signify that Orbán’s grip of power has weakened and is his ability to pass through sweeping reforms, as he did in the past, will be severely curtailed.

Even if there is continuity in leadership following the election, Hungary’s medium- and long-term outlook remains uncertain. The current government’s unorthodox expansionary fiscal policy, supported by lax monetary policy, has raised concerns over the sustainability of growth. Structural weaknesses, including poor demographics and low productivity, are not being addressed. In addition, tensions between the government and the EU could escalate further, posing a significant downside risk to growth. Hungary’s staunch opposition to EU refugee and immigration policies and the erosion of the independence of the country’s institutions has raised alarm in Brussels. A proposal by the European Commission to make disbursements of investment funds conditional on refugee settlement and the quality of democratic institutions could result in a sharp curtailment of EU investment funds, hampering growth.

FocusEconomics Consensus Forecast panelists project a 3.6% economic expansion in 2018, which is up 0.1 percentage points from last month’s projection. For 2019, the panel expects GDP growth of 3.0%.


Author: Jean-Philippe Pourcelot, Economist

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