European Commission Spring Economic Forecast for Romania: 2.6 % growth in 2022 and 3.6 % in 2023

*After strong growth in 2021, Romania’s economy is set to slow to 2.6 % in 2022.   After strong growth in 2021, Romania’s economy is set to slow to 2.6 % in 2022, as high inflation erodes disposable income and Russia’s war of aggression against Ukraine affects economic sentiment, supply chains and, ultimately, investment. Growth is expected to accelerate slightly in 2023, with a possible fall in inflation. Unemployment is projected to remain at around 5.5 %, while prices will peak this year, which will gradually decline in 2023. The general government deficit is projected to reach 7.5 % of GDP in 2022, to fall to 6.3 % in 2023, bringing the debt-to-GDP ratio to 52.6 % by 2023.   A slowdown in growth as war exacerbates existing difficulties   EU GDP is expected to remain positive over the forecast horizon due to the combined effect of post-isolation reopening and strong policy measures taken during the pandemic to support economic growth. In particular, the post-pandemic reopening of services with high contact intensity, a strong and continuing labour market, a lower accumulation of savings and budgetary measures to compensate for rising energy prices are expected to support private consumption.   Real GDP growth, both in the EU and the euro area, is currently projected at 2.7 % in 2022 and 2.3 % in 2023, down from 4.0 % and 2.8 % respectively (2.7 % in the euro area) in the winter 2022 interim forecast. The decline in 2022 needs to be seen against the backdrop of the growth dynamics of last spring and summer, which adds around 2 percentage points to the annual growth rate for this year. The increase in production during the year decreased from 2.1 % to 0.8 %.   The main impact on the world economy and the Union economy is related to energy raw material prices. Although they had already increased substantially before the war, from low levels during the pandemic, uncertainty over supply chains put upward pressure on prices, while increasing their volatility. This is what happened to food and other basic goods and services, amid a decline in household purchasing power. War-induced logistical and supply chain disruptions as well as increased production costs across a wide range of raw materials add to the disruptions in world trade caused by the drastic COVID-19 containment measures still applied in some parts of China, and affect production on the other.   Energy prices push inflation to record levels   Inflation has accelerated since the beginning of 2021. From 4.6 % year-on-year in the last quarter of 2021, it increased to 6.1 % in the first quarter of 2022. Headline inflation in the euro area rose to 7.5 % in April, the highest rate in the history of the monetary union.   Euro area inflation is projected at 6.1 % in 2022 and is expected to fall to 2.7 % in 2023. For 2022 as a whole, this represents a considerable upward revision compared to the winter 2022 interim forecast (3.5 %). Inflation is expected to peak at 6.9 % in the second quarter of this year and then gradually decline. For the EU, inflation is expected to rise from 2.9 % in 2021 to 6.8 % in 2022 and to decline again to 3.2 % in 2023. Average core inflation is estimated at more than 3 % in 2022 and 2023 in both the EU and the euro area.   A strong and improving labour market   The labour market is entering the new crisis on a solid basis. In 2021, more than 5.2 million jobs were created in the Union economy, attracting an additional 3.5 million people in the labour market. In addition, the number of unemployed has fallen by almost 1.8 million people. Unemployment rates at the end of 2021 fell below previous record levels.   Labour market conditions are projected to continue to improve. Employment in the EU is projected to increase by 1.2 % this year, although this annual growth rate is stimulated by strong dynamics in the second half of last year. Ukrainian war refugees in the Union are expected to enter labour markets only gradually, with tangible effects that will only become visible next year.   Unemployment rates are projected to fall to 6.7 % this year and 6.5 % in 2023 in the EU, while in the euro area they are expected to reach 7.3 % in 2022 and 7.0 % in 2023.   Public deficits continue to fall, but war-related costs increase   Despite the costs of measures to mitigate the impact of high energy prices and measures to support Ukrainian refugees, the aggregate public deficit in the EU is expected to continue to decrease in 2022 and 2023, due to the continued withdrawal of temporary COVID-19 support measures. From 4.7 % of GDP in 2021, the EU deficit is projected to decrease to 3.6 % of GDP in 2022 and 2.5 % in 2023 (3.7 % and 2.5 % in the euro area).   After falling to around 90 % in 2021 (97 % in the euro area) from the historic peak of almost 92 % of GDP in 2020 (almost 100 % in the euro area), the EU’s aggregate debt-to-GDP ratio is expected to fall to around 87 % in 2022 and 85 % in 2023 (95 % and 93 % respectively in the euro area), remaining above the previous level of COVID-19.   Uncertainty and risks depend on the evolution of war   Risks to economic activity and inflation forecasts depend to a large extent on the evolution of the war and, in particular, its impact on energy markets.   Given the high degree of uncertainty, the baseline forecast is accompanied by a model-based scenario analysis simulating the impact of rising commodity prices as well as the impact of a total gas supply disruption from Russia. In the latter, more severe scenario, GDP growth rates would be below the baseline of around 2.5 percentage points in 2022 and 1 percentage point in 2023, while inflation would increase by 3 percentage points in 2022 and by more than 1 percentage point in 2023, above the baseline projection.   In addition to these potential disruptions in energy supply, more serious than expected problems in supply chains, as well as further increases in prices of non-energy raw materials, in particular food, could lead to increased downward pressures on economic growth and upward pressures on prices. Higher-than-expected side effects caused by an imported inflationary shock could amplify stagnant forces. Strong inflationary pressures are also accompanied by increased risks to financing conditions. Finally, COVID-19 remains a risk factor.   Beyond these immediate risks, Russia’s invasion of Ukraine leads to an economic “decoupling” of the Union from Russia, with consequences difficult to fully understand at the moment.   Statements by the members of the College   Valdis Dombrovskis, Executive Vice-President for an Economy that Works for Citizens, said: “There is no doubt that the Union’s economy is going through a difficult period because of Russia’s war against Ukraine. As a result, we have revised our forecasts downwards.  The overwhelming negative factor is the rise in energy prices, which has pushed inflation to record levels and put pressure on European businesses and households. Although growth will continue this year and next year, it will be much more modest than we had previously expected. Uncertainty and risks to prospects will remain high as long as Russia’s aggression continues. However, there are some positive results that allow us to cope with this crisis. Our economic foundations are solid: before this war began, the Union’s economy had embarked on a path of strong recovery and growth. The Union’s economy is creating more and more jobs, attracting more people into the labour market and keeping unemployment at a low level. As Member States fully implement their recovery and resilience plans, this will provide the much-needed impetus to our economic strength.”   Paolo Gentiloni, Commissioner for Economy, said: “Russia’s invasion of Ukraine causes unimaginable suffering and destruction, but it also affects Europe’s economic recovery.  The war led to a sharp rise in energy prices and further disrupted supply chains. Therefore, inflation is now expected to remain at a higher level for a longer period of time. Last year’s strong economic recovery will continue to have a positive effect on this year’s growth rate. A strong labour market, the post-pandemic reopening and NextGenerationEU should provide additional support to our economies and help reduce public debt and deficits. However, these predictions are subject to a high degree of uncertainty and risks closely linked to the evolution of the war in Russia. Other scenarios are possible, where growth could be lower and inflation higher than we expect today.”   Context   These forecasts are based on a number of technical assumptions relating to the evolution of exchange rates, interest rates and commodity prices, based on the information available up to 29 April. For all other source data, including assumptions on public policies, these forecasts shall take into account information available up to and including 29 April. Unless new policies are duly announced and detailed, the projections are based on a no-policy change assumption. The European Commission publishes two sets of detailed forecasts each year (in spring and autumn) and two sets of interim forecasts (winter and summer). The interim forecasts include annual and quarterly GDP and inflation values of all Member States for the current year and the following year, as well as aggregated data for the EU and the euro area.   The European Commission’s summer 2022 economic forecast will update GDP and inflation forecasts and are expected to be presented in July 2022.