BNR: Forecasted dynamics of economic activity would remain robust in 2018, above potential, but falls in 2019

National Bank of Romania (BNR) Board members note that the much stronger-than-expected acceleration in economic growth during 2017 was anticipated to be followed by relatively more pronounced slowdowns in 2018 and 2019, according to the minutes of the monetary policy meeting held on February 7.

However, the forecasted dynamics of economic activity would remain robust in 2018, further taking higher values than the potential GDP growth rate, but would drop in 2019 to lower values, also due to the upward revision of the latter.

Developments pointed to relatively more sizeable excess aggregate demand until towards end-2018 and subsequently to a gradual contraction thereof, also in relation to the previous forecast.

“It was shown that the outlook stemmed mainly from the likely protraction of the expansionary nature of fiscal and income policies in 2018, followed by their return to a countercyclical stance in 2019, as well as from the anticipated deceleration in the growth rate of households’ real disposable income, inter alia as a result of the step-up in inflation; the outlook also implied gradually less accommodative monetary conditions, envisaged to become quasi-neutral in 2019, and improved EU funds absorption, as well as faster economic growth in the euro area/EU and globally,” the document reads.

According to Board members’ assessment, household consumption would likely remain the key driver of economic growth during 2018-2019 as well, whereas the contribution made by investment was expected to be modest, despite the slight recovery anticipated for 2018, and net exports were seen having a sizeable negative contribution, associated with a possible increase in the current account deficit as a share of GDP.

Concerns were reiterated about the composition of economic growth and the need for a solid rebound in investment, conditioned, however, not only on the carrying out of public investment and the absorption of EU funds, but also on investor confidence, depending in its turn on the evolution of fundamentals and on the quality of the business environment, as well as of the governance and legislative frameworks.

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