EC: Romania’s economy to decline by 6% in 2020, but it will recover in 2021

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Romania’s economy will decline by 6% this year following the coronavirus pandemic and after the lockdown measures, according to the forecast on Romania released by the European Commission. The EC also says that our country’s GDP will regain its growth in 2021.

“Real GDP is projected to decline sharply in 2020, after several years of robust growth. Private consumption, the main driver of growth in recent years, is expected to be impacted severely by the lockdown measures. Uncertainty is expected to hurt investment decisions, while net exports are  projected to contribute positively to growth. Unemployment is set to increase while inflation is forecast to ease due to the drop in oil prices. In 2021, real GDP is projected to rebound, though not to pre-crisis levels. The budget deficit is projected to increase significantly as the fiscal measures required to fight the COVID-19 crisis come on top of past fiscal slippages,” reads the EC spring prognosis for our country.

 

The EC notes that at the onset of the COVID-19 crisis Romaniaʼs economy was growing at an annual rate of around 4%, mainly driven by private consumption. However, signs of macro-economic imbalances had already emerged, notably in the form of high and growing current account and fiscal deficits.

Romania declared a state of emergency on 16 March and subsequently extended it until mid-May. Containment measures are expected to significantly affect services and manufacturing. To counter the negative impact of the crisis, the government adopted measures aimed at supporting consumers and businesses, such as loan guarantees for SMEs, temporary moratoriums on loan servicing, and technical unemployment schemes.

Real GDP is projected to contract by 6% in 2020 and rebound by 4¼% in 2021. Private consumption, which is expected to be significantly affected by lockdown measures in 2020, should increase gradually as these are lifted and contribute  positively to growth in 2021. After a very strong  performance in 2019, investment is projected to drop significantly in 2020, as businesses react to the very uncertain environment by postponing or cancelling investment projects. Public investment activity, meanwhile, is projected to be subdued. In 2021, investment is expected to recover only  partially amid persistent uncertainty,” says the Commission.

The EC says that exports are also set to contract in 2020, “reflecting the economic contraction in Romania’s main trading partners and supply chain disruptions”, while forecasting the will resume growth in 2021 as global economic activity gradually picks up.

“Imports are also set to decline, as domestic demand drops and as production in other countries is affected by lockdowns and supply chain disruptions. Overall, the contribution of net exports to growth in 2020 is set to turn positive and result in a lower current account deficit. However, this positive evolution is expected to start reversing in 2021.”

From a record low of 3.9% in 2019, the unemployment rate is projected to increase to 6½% in 2020 as some firms will inevitably close as a result of the COVID-19 crisis, although policy measures are expected to limit job losses. Nominal wages are projected to increase only moderately in 2020 after several years of double-digit growth and remain relatively subdued in 2021.

Inflation is projected to fall to 2.5% in 2020 mainly due to the sharp fall in oil prices. Core inflation is projected to ease somewhat but remain above 3% in 2020 and 2021. In response to the COVID-19 crisis, the National Bank of Romania cut its key monetary policy rate from 2.5% to 2% and started purchasing RON-denominated government securities on a secondary market in order to support the financing of the real economy and the public sector.
The current projections are subject to a particularly high degree of uncertainty. Beyond the uncertainty that affects all countries related to the evolution of the health crisis, global growth and international trade for Romania it will be important how the authorities balance the need for support measures with concerns about the medium-term trajectory of  public finances which pre-dated the COVID-19 crisis.

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