Garanti Bank expects a slowdown of Romania’s GDP growth rate up to 3.7 pc next year

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Garanti Bank estimates that Romania’s GDP growth rate could decelerate towards 3.7 percent in 2017, as consumption dynamic is expected to revert to pre-stimulus (food VAT cut, as of June 2015, general VAT cut as of January 2016 and public salary hike) levels, according to the Quarterly Macroeconomic Report.

The same report reveals that GDP advanced by 4.9 percent in the first nine months, strongly driven by consumption.

In terms of production, services, especially the IT and business support activities, are expected to remain the engine of economic growth since they kept the good dynamic of previous quarters.

Headline annual inflation is expected to increase from current -0.4 percent (October) towards 2 percent until the end of next year, while the core inflation is expected to remain at around 1.2 percent in 2017.

Based on the aforementioned report, Garanti Bank estimates that the National Bank of Romania (BNR) will implement a first rate hike in 2018, when inflation is expected to move above target. In the mean time, Garanti Bank expects central bank to maintain its key interest rate at 1.75 percent through the entire 2017.

According to Garanti Bank’s specialists, Romania’s macro fundamentals remain strong. However, there are two short term domestic risks under the radar: the risk of a higher budget deficit for next year driven by factors such as the increase in public wages but also other measures planned for 2017 and the domestic uncertainties regarding legislative changes that might impact the financial system.

For the banking system, the risk highlight falls on the giving in payment law and the Swiss Franc conversion law, which are currently subject to revision. The overall impact of these laws, however, would be lower than similar actions in other countries, according to Garanti Bank’s macroeconomic report.

Nevertheless, Romania is viewed as being stable by rating agencies, according to the bank.

The third quarter witnessed a stagnation in lending activity, as loans grew by 0.8 percent compared to same period last year and adjusted for the foreign currency effect, according to Garanti Bank’s report.

Investment in the economy started to rise this year and the bank expects the same trend in the future. The appetite for lending to the real estate corporate segment is still low, but prices in this sector have just started to pick up, suggesting that demand is growing.

Not least, Garanti Bank specialists believe that prospects for household lending in 2017 are good, especially if the proposal to extend the ‘First House’ program by 5 years passes through Parliament.

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