Europe does not need more bad economic news. The continent certainly does not need the inflationary pressure from the Israeli-U.S. war on Iran.
In most of the 27 EU member states, the economy was already at a virtual standstill, with unemployment at stubbornly high levels, inflation elevated, and public finances in a state of deterioration.
Hungary has stood as one of the exceptions to the European economic quagmire. However, going forward, the strength of the Hungarian economy is by no means given. The energy crisis in the wake of the Iran war has already affected Europe’s economies, and if the war drags on for much longer, the threat to economic stability will grow exponentially.
Not even a comparatively solid economy such as the Hungarian is immune to the consequences—especially not if the new prime minister, Peter Magyar, decides to start raising taxes.
A new report from the Hungarian Institute of International Affairs could hopefully dissuade Magyar on that front. The report, authored by Philip Pilkington and titled The Impact of the Energy Crisis on the Hungarian Economy, explains what the near-term future looks like for the Hungarian economy—even if there is no change to taxes or government spending.
Pilkington sets out to put numbers on the inflation risks to the Hungarian economy, should the Strait of Hormuz remain closed for an extended period of time. If that were to happen, he explains,
the crisis could precipitate a global depression as energy production starts to shut down. Bloomberg estimates that, at current rates of drawdown, world oil inventories will hit an operational floor in September … by then, pipelines and refineries may no longer be able to continue functioning at normal levels.
As frightening as this scenario is, its likelihood is high enough that policy makers, business leaders, and households all need to prepare for it. There is so much uncertainty around the progress—or lack thereof—in the talks between the United States and Iran that it would simply be irresponsible to dismiss, or even downgrade the importance of, a worst-case scenario like this one.
Based on the experiences from the spike in energy prices immediately following the Russian invasion of Ukraine, Pilkington compiles forecasts of those same prices for the coming months. As an extreme but not impossible scenario, he suggests that the price of oil could reach as high as $250 per barrel.
It is worth noting that the U.S. government’s Energy Information Agency, in its 2026 Annual Energy Outlook, does not include an extreme scenario for oil prices. However, the EIA’s outlook is based on the premise that there will not be a protracted conflict in the Middle East. With his study, Philip Pilkington demonstrates what a dramatic difference it makes if the EIA’s premise turns out to be wrong and the Middle East conflict drags on into the fall.
If anything, the contrast between the EIA and Pilkington scenarios illustrates what major economic difference global politics can make. If the latter turns out to be true, even within a more ‘mainstream’ scenario with the oil price in the vicinity of $150, the inflationary consequences would still be serious. The main reason, Pilkington explains, is that
changes in the oil price drove most of the change in both inflation and the value of the forint during the last energy crisis.
The blunt message from his model is that consumer-price inflation in Hungary will respond to the oil-price shock with a (statistically likely) four-month lag. When they do respond, though, they embark on a trend to 10% inflation at the end of the summer and 20% at the end of 2026.
In other words, Hungary would be looking at a return to the tough inflationary episode on the heels of the 2020 pandemic and Ukraine-war-driven energy prices. And this is only under the ‘moderate’ scenario: if the Iran war extends into the fall and the $250/barrel oil price materializes, by the summer of 2027, Hungarian inflation could be closing in on 60%. Even in the moderate case, inflation could reach as high as 30% a year from now.
These are no doubt worrisome scenarios, naturally leading to skepticism and questions as to what credibility to attach to economic forecasting in general. Anyone practicing economics knows that forecasting is the most difficult part of the job, especially from a credibility viewpoint. If the oil price lands at $150 some time in the fall but Hungarian inflation only rises to 15% by the end of the year, has Pilkington then made a bad forecast?
No, he has not. His work remains credible. Forecasting is based on a ‘cone’ of possible outlooks into the future: the forecaster is standing at the narrow end of the cone, and his job is to narrow down the width of the cone as much as possible. The more uncertain the future is, the wider the cone will be, but even when he has taken all appropriate methodological steps to narrow down that cone, there will always remain a roster of possible outlooks.
Which of these possible outlooks should the forecaster pick? In econometric forecasting, the numbers normally dictate which ones are emphasized; this is the route Pilkington follows. His forecast is short-term in the sense of stretching a few months—a year at most—into the future; he is also working with well-known variables in a clearly defined economic context. Therefore, he can let the numbers ‘talk’ and put a lot of credibility in them.
Things get a bit more problematic when we take a step beyond high-credibility forecasting and delve into the uncertain. There is one such element in Pilkington’s report, namely the aforementioned difference between his oil price assumption and that of the U.S. EIA. Pilkington has good reasons to use the two prices in his analysis, $150 and $250 per barrel of oil, respectively, but the difference vs. the American outlook nevertheless points to how difficult it is to eliminate uncertainty in forecasting.
Policymakers who look at economic forecasting for help in making decisions are well advised to evaluate a report like this one based on the ‘Keynes rule’: The good old British economist summarized the principle of good forecasting as ‘It is better to be approximately right than exactly wrong.’ If Hungary’s new government takes Pilkington’s report to heart—as they should—they can treat it as exactly that: a good approximation of what is likely to happen in the coming months. If they then base their economic policy on that, they can avoid making mistakes that will erode the strength that Fidesz gave Hungary’s economy. By acting prudently based on Pilkington’s report, the Magyar administration can help shield Hungarian businesses and families from the worst effects of whatever energy-price punch awaits them.
