European Commission summer economic forecasts for Romania: 3.9 % growth in 2022 and 2.9 % in 2023

* Russia’s war of aggression against Ukraine continues to negatively affect the EU economy, steering it towards lower growth and higher inflation compared to spring forecasts.   In the first quarter of 2022, Romania’s economy caught an upward trend, with real GDP growth of 5.2 %. According to provisional data, this positive result is explained by a significant increase in gross fixed capital formation and private consumption, while net exports made a negative contribution. This robust increase was supported by higher wages, which kept pace with inflation, and the phasing out of COVID-related restrictions.   Thanks to this very strong first quarter, GDP growth for the whole of 2022 has been revised upwards, estimated at 3.9 %. However, a downward revision to 2.9 % is required for 2023, in line with the slower global and EU growth outlook. Private consumption and investment will be the main drivers of growth this year and next, and net exports are expected to act as a brake on GDP, leading to an increase in the trade deficit.   According to the (intermediate) summer 2022 economic forecast, the EU economy will grow by 2.7 % in 2022 and 1.5 % in 2023. The euro area is projected to increase by 2.6 % in 2022, with a more moderate pace of 1.4 % in 2023. Average annual inflation is expected to peak in 2022, i.e. 7.6 % in the euro area and 8.3 % in the EU, before decreasing in 2023 to 4.0 % and 4.6 % respectively.   War shocks have a negative impact on growth   Many of the negative risks associated with the 2022 spring forecast materialised. Russia’s invasion of Ukraine has put further pressure to increase energy and basic food prices. These factors fuel global inflationary pressures, erode households’ purchasing power, and trigger a faster monetary policy response than previously expected. The continued slowdown in US growth adds to the negative economic impact of China’s rigorous zero-COVID policy.     The EU economy remains particularly vulnerable to developments in energy markets due to its high dependence on fossil fuels in Russia and the slowdown in global growth has the effect of reducing external demand. The momentum gained with last year’s revival and a slightly stronger than expected first quarter should support the annual growth rate for 2022. However, economic activity for the rest of the year is expected to be modest despite a promising summer tourist season.   Quarterly economic growth is projected to accelerate in 2023 against the backdrop of labour market resilience, inflation moderation, support from the Recovery and Resilience Facility and the still large volume of surplus savings.   Overall, the EU economy will continue to expand, but at a much slower pace than expected in the 2022 spring forecast.   Record inflation is expected to fall in 2023   By June, headline inflation had reached record highs as energy and food prices continued to rise and price pressures spread to services and other goods. In the euro area, inflation rose sharply in the second quarter of 2022, from 7.4 % in March (compared to the same period of the previous year) to a new record high of 8.6 % in June. In the EU, growth was even more pronounced, with inflation rising sharply by an entire percentage point, from 7.8 % in March to 8.8 % in May.   Inflation projections have been revised considerably upwards compared to the spring forecast. In addition to strong price growth in the second quarter, a further increase in natural gas prices in Europe is expected to pass on to consumers also through electricity prices. Inflation is projected to peak at 8.4 % (compared to the same period of the previous year) in the third quarter of 2022 in the euro area, after which it will decline steadily to below 3 % in the last quarter of 2023 in both the euro area and the EU as pressures from commodity prices and supply constraints diminish.   Risks remain high and depend on the evolution of the war   Risks related to economic activity and inflation forecasts depend to a large extent on the evolution of the war and, in particular, its implications for Europe’s gas supply. Further increases in gas prices could lead to a further increase in inflation and a slowdown in economic growth.   Side effects could in turn amplify inflationary forces and lead to a sharper tightening of financial conditions, which would not only affect growth but also entail increased risks to financial stability. The possibility that the reappearance of the pandemic in the EU could cause further disruption to the economy cannot be ruled out.   At the same time, recent downward trends in oil and other commodity prices could intensify, leading to a faster-than-expected decline in inflation. Moreover, thanks to a strong labour market, private consumption could prove more resilient to rising prices if households made more use of accumulated savings.   Context   The Summer 2022 Economic Forecast provides an update of the spring 2022 economic forecast, which was presented in May 2022, focusing on GDP and inflation developments in all EU Member States.   These forecasts are based on a number of technical assumptions regarding the evolution of exchange rates, interest rates and commodity prices, based on the information available up to 30 June. For all other source data, including assumptions relating to public policies, this forecast takes into account available data up to and including 5 July.   The European Commission publishes two sets of detailed forecasts each year (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 next forecast by the European Commission will be the autumn 2022 economic forecast, which is expected to be published in November 2022.