The National Bank of Romania (BNR) estimates and inflation of minus 0.3% this year and of 0.7% in 2016, the quarterly report on inflation released on Thursday by Governor Mugur Isarescu reads.
The inflation outlook was calculated by taking into consideration the tax cuts included in the new Tax Code, in its current form. “If it changes, we’ll recalculate,” Isarescu said.
Thus, the outlook anticipates 0.5% decrease this year and 1.2% increase in 2016, as compared to the former forecasts included in the May reports. BNR anticipated inflation of 0.2% this year and of 1.9% for 2016.
Two days ago, the BNR Governor said inflation will be negative for the next three quarters and then will get into the positive territory, however below 1.5% until 2017.
Tax easing space – nil by year end, BNR Governor says
The large tax easing operated last year and in June this year leads to a very narrow tax easing space that will be gone by year end, when we’ll have demand in excess and it will be reflected in inflationary pressures and in the current account deficit.
“In July 2010 we had an increase in the average rate of VAT from 17.5% to 22%, but was reduced substantially, I’d say, to 20.6% when the VAT for bread was cut in September 2013, then was reduced to 16 % in June this year when the VAT for food was cut. It is the smallest level in 15 years, it’s below the average rate prior to June 2010 and the impact on prices was seen. The huge fiscal relaxation last year and in June 2015 totally changed the trajectory of what we call potential GDP. This fiscal easing (…) leads to a narrower easing space very quickly which will disappear by year end,” BNR governor Mugur Isarescu said on Thursday during the conference for the presentation of the quarterly Inflation Report.
“By stimulating the demand starting this autumn will produce only smoke, will lead to inflation or to higher current account deficit. We work with quite precise calculations. (…) The easing space narrows, we want more easing; economic growth comes not only from incentives, is the result of productivity and jobs. If you do not act on these two factors and act only on incentives, an inflection point will be reached and the easing space is gone; by pressing the accelerator, we head nowhere, it leads to higher fuel consumption, consumption of resources and imbalances,” said Isarescu.
He recalled that the political objective to recover the losses against the pre-crisis period was accomplished, the economy has reached the pre-crisis level of the GDP, which was swollen, overheated – in the governor’s opinion.
However, he drew attention to the investments, which fell by 45%, representing a big problem that complicates decisions.
He notes that economic policy decision in the coming period is very complicated, and the investments problem must be solved because they are a factor for increasing the productivity and for sustainable economic growth, “if we want to grow for more years.”
He also referred to the factors that limit the growth of labour productivity, namely that the labour market does not provide sufficient qualified personnel, except for a few industries such as ICT, automotive, food industry, hotels and restaurants, light industry and metallurgy.
The governor reiterated that the views expressed by the IMF and the European Commission on tax easing are legitimate.
Macroeconomic situation very good, yet no room to ruin it
Romania’s economic situation is very good right now, but it should be further stimulated through investments and by providing jobs – the main factors to increase productivity, instead of consumption, which is already growing too fast and risks producing imbalances, Mugur Isarescu says.
“We pass extremely fast from deficit of demand to excess of demand, which places us in a difficult situation (…) What shall we do with the investments, since they are a factor in increasing productivity and sustainable growth (…) We record minus 45pct at investments. This is a major problem that is complicating our decisions. Which means, what are we stimulating further, the final consumption or the gross formation of capital in order to gain economic growth?” the central bank’s head asked.
The BNR head pointed out the lack of correlation between the evolution of salaries and productivity. Romania has an innovation index way below the European average (…) and a structural problem when it comes to its labour market. The labour market’s indicators look fine, yet there could occur tensions due to the salary rise in the private sector that will be followed by similar evolutions in the public sector.”