Romania’s GDP growth is forecast to decelerate in 2018 but will remain robust, European Commission (EC) shows in its Spring 2018 Economic Forecast. Private consumption is forecast to slow down in 2018, as nominal wage growth moderates and inflation increasingly weighs on real disposable income, but will remain the main driver of growth.
Investment, however, is likely to further strengthen in 2018 on the back of a pick-up in the implementation of projects financed by EU funds. Overall, real GDP growth is expected to be 4.5 percent in 2018 and 3.9 percent in 2019. The output gap is estimated to have turned positive in 2017 and is forecast to remain relatively stable over the forecast horizon.
Imports are projected to continue rising faster than exports in 2018 and 2019. Accordingly, net exports will remain a drag on real GDP growth.
At the same time, the current account deficit widened to 3.5 percent of GDP in 2017 and EC forecasts to be 3.6 percent of GDP in 2018 and 3.9 percent in 2019.
As regards the wages, these are expected to continue to grow in 2018, albeit at a slower pace, due to further increases in public wages and an additional 9 percent increase in the net minimum wage which took effect in January, Brussels officials note.
Inflation picked up in late 2017 and is set to rise further
Inflation further accelerated in early 2018 as the effect of the January 2017 tax cuts faded away, reaching 4 percent by March.
EC forecasts inflation to reach 4.2 percent for 2018 as a whole and to decline to 3.4 percent in 2019 as energy price inflation moderates. Core inflation is projected to increase from 0.8 percent in 2017 to 3.3 percent in 2018 and 3.5 percent in 2019.
”The gradual tightening of the central bank’s monetary policy in response to emerging inflation pressures and a widening output gap could dampen the outlook for private investment. Investment could also be adversely affected if the government were to further cut public investment in order to reach its budgetary deficit targets. A continuing increase in unit labour costs, due to wage growth outpacing productivity growth, may also curtail Romania’s exports. More generally, uncertainty regarding the government’s policies could hamper growth,” Spring 2018 Economic Forecast reads.
This year, the general government deficit is projected to increase to 3.4 percent of GDP. The unified wage law, enacted in summer 2017, increased gross public wages by 25 percent in January 2018 and contains additional increases for doctors and teachers. The fiscal cost of this is set to be partially compensated by a shift of social security contributions from 22.75 percent for employers and 16.5 percent for employees to 2.25 percent and 35 percent respectively. Moreover, the flat personal income tax (PIT) rate was cut from 16 percent to 10 percent.
”The deficit is projected to reach 3.8 percent of GDP in 2019, driven by increases in social transfers and public investment. As a consequence of fiscal easing, Romania’s structural deficit has risen from around 2 percent of potential GDP in 2016 to around 3¼ percent in 2017 and is projected to reach around 4¼ percent in 2019. Despite strong GDP growth, the debt-to-GDP ratio is thus projected to increase within the forecast horizon,” EC concluded.