EC Autumn 2023 Economic Forecast for Romania: Real GDP growth is projected to slow down to 2.2 %

While economic activity is expected to recover gradually in the future, the European Commission’s autumn forecast is revising EU GDP growth down from the summer projections. Inflation is expected to have declined to its lowest level in two years in the euro area in October and will continue to decline over the forecast horizon.     Real GDP growth în Romania is set to decelerate to 2.2% in 2023 due to high inflation constraining real disposable incomes, tight financial conditions and lower external demand, before gradually accelerating over the forecast horizon. With sticky core inflation (HICP inflation excluding energy and food), the decline in headline inflation is projected to only pick up in 2024 and 2025.   The labour market is expected to remain tight despite weaker growth, keeping wage increases high. The general government deficit is projected at 6.3% of GDP in 2023, before declining to 5.3% in 2024 and 5.1% in 2025, due to fiscal consolidation measures set to be implemented in January 2024. The debt-to-GDP ratio is forecast to reach 50.5% in 2025. Over 2023, business sentiment, retail sales and services have lost significant momentum and industrial production has deteriorated further. After buoyant real GDP growth of 4.6% in 2022, growth is expected to decelerate to 2.2% in 2023, as tight financing conditions, relatively slow disinflation and muted growth in trading partners are taking a toll on production output.   Robust increases in wages and pensions are supporting private consumption growth, which is expected to stay positive this year, and government consumption is also set to slightly accelerate.   The tightening of monetary policy and financing conditions led to a marked slowdown in private credit growth, with a negative impact on private investment.   Nevertheless, EU-funded investment in public infrastructure funded is providing a strong stimulus to growth. Gross fixed capital formation is projected to advance by more than 8% in 2023. The negative contribution from net exports to GDP growth is set to narrow in 2023 and, together with improving terms of trade, is expected to reduce the current account deficit to about 7.3% of GDP, from 9.3% of GDP in 2022.   Real GDP growth is projected to accelerate to 3.1% in 2024 and 3.4% in 2025, supported by solid increases in real disposable income, a diminishing impact from past interest hikes, and resilient public consumption and investment. While private consumption is expected to accelerate, investment will remain the main contributor to GDP growth over the forecast horizon. Driven by robust external financial inflows and a large government deficit, the current account deficit will likely stay above 7% of GDP in 2024 and 2025.   Low unemployment and high wage increases   The labour market continues to be tight, mainly reflecting unfavourable demographic trends. The unemployment rate is projected to decline marginally to around 5.4% in 2023 and remain at a low level over the next two years, despite weaker growth.   Nominal wages in both the public and private sectors are expected to grow strongly at a double-digit rate in 2023 and continue at a fast pace also in 2024. Therefore, the increase in real wages is projected to be high this year and next.   Protracted disinflation process   Lower energy prices are forecast to lead to a slow decline in headline HICP inflation, from about 12% on average in 2022, to slightly below 10% in 2023. Yet, core inflation is expected to remain sticky and above headline inflation in 2023, on the back of hikes in food and services prices.   Overall, average HICP inflation is set to decelerate faster in 2024 and 2025, and eventually re-enter the central bank inflation target range, but risks are tilted towards a more gradual reduction.   Government deficit is projected to decline only gradually in 2024 and 2025 Romania’s general government deficit is forecast to reach 6.3% of GDP in 2023, the same level as in 2022. This is a sizeable upward revision compared to the deficit of 4.7% of GDP projected in the Spring Forecast. The larger-than-expected deficit this year reflects higher-than-expected government spending (in personnel and goods and services, in particular) and slower revenue growth due to weaker economic activity.   Public investment as a share of GDP is expected to rise significantly, reflecting ambitious targets for both nationally and EU-funded investment projects. The cost of measures to mitigate the impact of high energy prices is estimated at 0.3% of GDP in 2023.   The deficit is forecast to fall to 5.3% of GDP in 2024, due to the implementation of a fiscal consolidation package amounting to about 1.2% of GDP. On the expenditure side, the package includes spending cuts, generated through measures to streamline public administration and tighter eligibility conditions for public servants to benefit from holiday vouchers and food allowances.   On the revenue side, new measures are expected to yield additional revenue amounting to 0.9% of GDP. The main measures include an increase in corporate taxation, a partial phasing-out of preferential tax regimes for the construction and agriculture sectors, and the elimination of reduced VAT rates for selected goods and services.   The deficit-reducing effect of the fiscal consolidation package is set to be partially offset by robust growth in personnel expenditure. The forecast does not include the potential short-term cost of the pension reform currently being prepared. In 2025, the deficit is projected to record another modest decline, reflecting the full phase out of measures to mitigate the impact of high energy prices and the impact of administrative reforms to contain government personnel expenditure.   The general government debt is expected to increase from 47.2% of GDP in 2022 to 50.5% in 2025, reflecting still high deficits and slower nominal GDP growth in the coming years. Risks to the fiscal outlook are tilted to the downside. Possibly lower GDP growth and upside pressures on public wages could result in higher government deficits.   (Details on:https://economy-finance.ec.europa.eu/economic-surveillance-eu-economies/romania/economic-forecast-romania_en)