Economic growth in Romania is expected to remain robust in 2015 and 2016, driven by strong private consumption with marginal contributions from net exports and inventories and driven also by recovering investment, according to the European Commission’s (EC) Spring 2015 Economic Forecast.
„GDP growth is forecast to remain robust and above potential at 2.8 percent in 2015, mainly driven by private consumption and investment. Accelerating domestic demand, again boosted by cuts in indirect taxation, as well as a benign external environment, are expected to lift real GDP growth to 3.3 percent in 2016,” European institution says.
In Brussels officials’ view, the consumer sentiment is at a post-crisis high and expected wage increases accompanied by a lower VAT rate for food as of June 2015, a more favourable labour market outlook and low inflation are set to raise household real disposable income.
Private investment is likely to continue growing over the forecast horizon supported by lower borrowing costs, a tax exemption on reinvested profits, robust economic growth prospects, and economic sentiment levels which are at a seven-year-high. Public investment is expected to grow in 2015 with EU funds absorption picking up, before decreasing in 2016.
Exports to increase, but at a slower pace
The growth contribution of net exports is forecast to turn negative in 2015 and remain so in 2016. According to EC, exports are expected to keep growing in 2015 and 2016, but at a slower pace, while increasing domestic demand stimulates even stronger imports. After the current-account deficit improved to 0.5 percent of GDP in 2014, it is forecast to increase in 2015-2016, reflecting the deterioration in the trade balance driven by higher imports.
As regards the annual average inflation, it is forecast to decelerate further to a record low of 0.2 percent in 2015 owing to the VAT reduction for food, low energy prices and the persistence of low inflation in the EU. Surging domestic demand is expected to exert upside pressure on inflation in 2016, but the 4 percentage points across-the-board cut in VAT will work in the opposite direction, resulting in an annual average inflation of 0.9 percent.
Employment in Romania is projected to continue growing in 2015 and 2016, while the unemployment rate is expected to decrease further to 6.4 percent by the end of the forecast period. „Pushed by wage increases, compensation per head is expected to grow steadily in 2015 and 2016, despite the cut in social security contributions enacted in October 2014; against the background of low inflation, this will result in higher real wages,” EC shows. As productivity growth picks up again in 2016, unit labour costs increase but only moderately over the forecast horizon.
Downside risks stem mainly from households constraining consumption more than expected to reduce their indebtedness and from a possible escalation of the Russia-Ukraine crisis.
The government budget deficit is forecast to widen slightly to 1.6 percent of GDP in 2015, as a reduction in the tax revenue-to-GDP ratio more than offsets the reduction in the expenditure ratio. The revenue projection includes the full-year impact of the cut in social security contributions, the reduction in the special construction tax rate and the reduction of VAT rates for foodstuff and related services to be implemented starting June 2015.
According to EC, for 2016, the headline deficit is expected to sharply deteriorate to 3.5 percent of GDP. This forecast incorporates the new draft fiscal code that was adopted by the government on 18 March but is awaiting parliamentary approval.
An amendment to alleviate cuts in excise rates and dividend taxation, as reportedly proposed by the senate budget committee, would bring the deficit close to 3 percent of GDP.
In structural terms, the deficit is forecast to remain stable at around 1¼ percent of GDP in 2014-15 and to worsen to 3½ percent of GDP in 2016. Government debt is set to increase from 39.8 percent of GDP in 2014 to 42.4 percent of GDP by 2016.
EU’s real GDP in 2015 is now expected to rise by 1.8 percent in the EU and by 1.5 percent in the euro area, respectively 0.1 and 0.2 percentage points higher than projected three months ago. For 2016, the Commission forecasts growth of 2.1 percent in the EU and of 1.9 percent in the euro area.