Romanian Economic Monitor: In 2025, Romania's DGP will grow by 1.5%, despite 3-4% potential

Romania's GDP will have a modest increase of 1.5%, compared to 0.9% in 2024, but below the economic potential which can be closer to an annual 3-4% growth, on the long run, according to analysts of the Romanian Economic Monitor (RoEM), a research project of the Faculty of Economic Sciences and Business Management (FSEGA) from Babes-Bolyai University (UBB) in Cluj Napoca. If it were not for present negative influences, Romanian economy could have an annual increase potential of 3-4%.   Global political instability and geopolitical risks are factors which influence growth. Economic growth of 2024 was based on salary rises and consumption acceleration, mostly covered from import. Due to the drop of local economic competitiveness, net exports had a negative contribution to GDP. European funds are a potential solution to save GDP increase in 2025. Accession to the Schengen area can positively influence Romania's economic growth. This evolution can be endangered by a series of domestic factors – the need of strictly managing budget deficit, political instability (even after the CCR decision of March 11), as well as external ones – global geopolitical risks, the slow return of economy to the euro area.   According to detailed provisional data, published last wek by the National Statistics Institute, Romania's GDP in 2024 grew below the economic analysts' expectations by only 0.9%, being very close to the latest estimate of the RoEM team at the end of 2024, of +1%, reviewed on the drop in two stages of 3% and from 1.8%.   The main economic growth engine in 2024 was salary increases, especially in the budget sector and pension rises in an election year   “This figure shows a significant deceleration versus the economic growth of 2.4% recorded in 2023. But the economic increase of thelast quarter of 2024 was also below expectations, only 0.7% against the same quarter of the previous year. The main engine of economic growth in 2024 was the increase of real incomes of the population in Romania – salary rises, especially in the budget sector, the rise of the lowest salary, pension increases in an election year, combined with a gradual inflation tempering. All these aspects were reflected in a significant acceleration of household consumption expenses which had a contribution of + 3.6% to the increase of Romania's GDP throughout 2024,” said Levente Szasz, prorector at UBB Cluj Napoca, the coordinator of RoEM team.   The speeding up of final consumption also maintained in the last quarter of 2024 (with a contribution of +4% to GDP increase in that quarter), which according to RoEM analysts will remain the most signficiant increase for a longer period of time, 2025 bringing more temperate figures in that respect.   “The private sector in Romania did not succeed to capitalize from this ingrease fo final consumption in 2024, and that thing was reflected in the significant positive dynamic of imports of goods and services. But, on the other hand, exports had a modest evolution, both because of external problems and of the evolution below expectations of industries in the euro area and the relative drop of Romanian economic competitiveness (higher labor force costs and the poor evolution of labor productivity). All those determined net exports to have a negative contribution to GDP increase of -2.9% in 2024,” said Csaba Balint, a member of RoEM research team.   Another negative surprize from the economic point of view was recorded in quarter IV, 2024, in the investment field. Contrary to previous quarters, investments recorded a significant drop (of two figures), as a result of slow-downs in the industrial construction and investment sector, according to RoEM analysts.   “While constructions in the residential sector showed signs of weakness in previous quarters, infrastructure investments (mostly fel by state expenses) could not bring a positive contribution to economic performance of quarter 4, 2024 (as it happened in 2023): the contribution to GDP increase was -3.3%, thus pushing annual contribution to the negative area (investments contributing by -0.4% to GDP increase in 2024)” said Levente Szazs, the coordinator of the research team.   From the perspective of the main economic sectors, the last quarter of 2024 brought only a modest increase in industry and services (with contributions of +0.2% and 0.4% respectively, to GDP rise in that quarter), while constructions had a negative impact, according to investment drops (contribution of -0.7%). These evolutions, together with the poor performance of agriculture in quarter 3, 2024, mainly caused by drought, determined a GDP increase of only 0.9% in 2024, RoEM economists say.   “In 2025, GDP will have a modest acceleration compared to the previous year, reaching a 1.5% increase, according to our estimates. At the level of use categories part of GDP, we expect that the dynamic evolution of domestic consumption of the previous year will significantly slow down this year: fiscal measures destined to the reduction of budget deficit will also limit population incomes, while 2024 record consumption increase is rather unsustainable on the long run. In 2024, net export cut down economic growth, but, on the background of decelerating population consumption, we expect this negative contribution to drop this year. Following the weak performance of investments the previous year, investments based on European funds could “save” the acceleration of economic growth this year, with a moderate return compared to last year's unexpected drop,” Csaba Balint showed.   In order for that to happen, it is essential to access European funds and use them more efficiently for investments, especially in infrastructure , without which economic acceleration this year wouls seem hard to achieve, RoEM analysts explain.   Another factor we talked about too little because of the political crisis is Romania's full accession to the Schengen area.   The accession can add a plus to the country's economic growth by speeding up international trade (including exports of products made in Romania), by attracting new investors in Romania which thus can connect ore easily to the West European logistic network. Also, being part of the Schengen area can represent an additional impulse for political decision makers to accelerate infrastructure development, thus making more dynamic transports crossing the western border of the country.   “Taking into account all these factors, we estimate a 1.5% GDP increase this year. But this rise, even over the 2024 economic growth, is a lot below Romania's economic potential, which could be closer to an annual rise of 3-4% on the long run. Moreover, the foreign and domestic context will place additional pressure on the economic evolution of the country in 2025,”the UBB prorector showed.