Romania’s economic growth is forecast to accelerate this year to 3.5 percent and next year to 4.1 percent and to remain strong in 2017, as fiscal stimulus spurs domestic demand at the price of a rising fiscal deficit, according to European Commission (EC)’s latest Autumn Economic Forecast, released on Thursday.
The current-account deficit is projected to expand slightly to 0.8 percent of GDP in 2015 due to a larger trade deficit.however, this year’s deficit is expected to stay within the 1.5 percent of GDP target.
With a tight labour market and deflation, the 4 percentage points cut in the standard VAT rate is expected to push private consumption to a post-crisis peak in 2016 and fuel real GDP growth of 4.1 percent, EC warns.
Private consumption growth is forecast to moderate in 2017 as the impact of VAT cuts fades and inflation picks up. GDP growth is nevertheless expected to remain above potential at 3.6 percent in 2017. Private investment is forecast to continue growing, driven by the recovery of housing construction and supported by lower borrowing costs, new tax incentives and robust economic-growth prospects.
As regards the public investment, this is set to grow in 2015, the last absorption year of the 2007-2013 programming period of EU funding, but is likely to underperform compared to the initial 2015 budget. It is projected to decline in 2016, as EU funds’ absorption drops, before picking up again in 2017.
“The contribution of net exports to growth is foreseen to remain negative in 2015-2017, as rising domestic consumption lifts demand for imports. Exports slow in line with global trade, but recover with investment in 2017. Romania’s current-account deficit is forecast to widen to 1.9 percent of GDP in 2016 and 2.6 percent of GDP in 2017,” Brussels-based representatives note.
Inflation to bottom out in mid-2016
Annual average inflation is forecast to reach -0.4 percent in 2015 owing to the cut of the VAT rate for food in June, low energy prices, and low inflation in the EU. As the impact of the VAT cut for food wears out by mid-2016, strong domestic demand is expected to push inflation back to positive territory.
However, the reduction of the standard VAT rate by 4 percentage points in 2016 will work in the opposite direction, resulting in an annual average inflation of -0.3 percent. Despite an additional 1 percent. VAT cut in 2017, inflation is forecast to reach 2.3 percent on annual average. Possible increases of minimum and public wages tilt the risks to the upside in 2016 and 2017.
Downside risks to the growth forecast stem mainly from a potentially stronger impact of the global trade slowdown. Upside risks are related to a better-than-expected absorption of EU funds and a higher multiplier effect from the fiscal stimulus.
As regards the unemployment in Romania, this is expected to decrease to 6.5 percent by 2017, while the employment is projected to grow continuously over the forecast period, in line with economic growth.
“The solid wage growth in 2015 is likely to persist in 2016 and 2017 as the labour market tightens. However, labour productivity is still projected to grow more than 3 percent per year, helping to contain unit labour cost increases. Envisaged, but not yet legislated, minimum-wage increases are not included in this forecast,” EC said.
The institution appreciates that all important tax categories are likely to contribute to higher revenues than anticipated in the original budget, which reflects both strong economic growth and enhanced tax compliance. On the expenditure side, savings stem from low public investment and the smaller co-financing of EU-funded projects compared with the budget.
The structural deficit is forecast to increase from around 1 percent of GDP in 2015 to close to 4 percent in 2017 as a consequence of the fiscal easing and the closing of the output gap in 2016-17.
Romania’s debt-to-GDP ratio is projected to rise from 39.4 percent in 2015 to 42.8 percent in 2017, EC pointing out that the developments in public sector wages represent a key risk to the deficit outlook.