The European Commission has improved the estimates regarding the growth of the Romanian economy this year, from 3.9% as it anticipated in July to 5.8%, according to the autumn economic forecasts, published on Friday.
In the first semester of 2022, Romania’s economy grew at an annual rate of 5.7%. In particular, private consumption and investment grew strongly as pandemic restrictions were lifted, allowing pent-up demand to catch up. In addition, a strong labor market, with higher employment growth and rising wages, supported disposable income, as did government measures to mitigate the impact of high energy prices, noted in the EC report.
However, in the second half of 2022 and beyond, the fallout from Russia’s invasion of Ukraine, high inflation, tightening monetary policy and strong liquidity controls are expected to significantly slow GDP growth. Sectors such as agriculture, the extractive and chemical industry would be particularly affected, warns the European Commission.
Romania’s economy would not benefit from support from the external sector. In 2022, strong domestic demand will further deepen the current account deficit (to 9.1% of GDP). Thereafter, the slowing economy will provide limited improvement, due to lower demand for imports. The current account deficit would be reduced to 8.8% of GDP in 2023 and 8.4% of GDP in 2024.
Overall, GDP would grow by 5.8% in 2022, 1.8% in 2023 and 2.2% in 2024.
During 2022, the unemployment rate fell to the pre-pandemic level and is estimated to reach 5.4% on the back of strong economic growth. Despite a slight increase to 5.8% in 2023, the tightening of the labor market will continue, supporting strong increases in nominal wages in the private sector. In 2024, the unemployment rate should register a slight decrease, in line with the economy.
Rising energy and food prices internationally have spread to the core components of inflation and are expected to push up nominal wages. In this context, it is estimated that inflation will remain persistent during the period analyzed in the forecasts. As the energy support scheme is due to expire in the third quarter of 2023, retail energy prices are likely to rise. Overall, inflation will reach 11.8% in 2022, 10.2% in 2023, before falling to 6.8% in 2024.
The European Commission predicts that Romania’s public deficit will fall to 6.5% of GDP in 2022, from 7.1% of GDP in 2021. Revenues would benefit from the solid growth of nominal GDP, energy taxes and non-tax revenues. In terms of spending, public investments would be higher than in 2021, while wages in the public system, social assistance and government purchases will grow more slowly than nominal GDP.
The forecast takes into account the measures to mitigate the economic and social impact of high energy prices adopted in April (food vouchers, fuel subsidy) and July (increases in salaries in the public system, single payment to pensioners), the amendment of the tax code and the scheme of compensation to face the increase in energy prices until August 2023 (which would have a slightly positive budgetary impact, excluding the already mentioned economic support measures). The positive impact on revenues from the high nominal GDP growth and the reform of the tax administration on tax collection partially offset the increasing pressures on the deficit, following the economic and social support measures, and from the increase in interest payments as a result of the deterioration of access to market.
The deficit is expected to decrease to around 5% of GDP in 2023, mainly due to the decline in current expenditure as a percentage of GDP and through the effect of automatic stabilizers, as nominal economic growth is forecast to remain high. The EC estimates a sustained increase in capital expenditures, due to the implementation of the PNNR and other nationally funded investments. In 2024, the deficit is forecast to fall to 4.8% of GDP.
The EU executive forecasts that public debt will fall to 47.9% of GDP in 2022, 47.3% of GDP in 2023, before rising to 47.6% of GDP in 2024.