European Commission: Romania, GDP growth of 4.3pc – below the winter forecast, higher deficit

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Romania will have a solid economic growth of 4.3% in 2017, supported by fiscal easing and wage growth, the European Commission spring report reads, which warns that the budget deficit will continue to grow to 3.5% of GDP, due to tax cuts and high public spending.

At the same time, the draft unitary wage law generates significant risks on tax estimates, according to the EU Executive.

The European Commission expects Romania to register 4.3% economic growth in 2017, by 0.1 percentage points below the estimate included in the country report released in February. For 2018, the Commission maintained its forecast for GDP growth of 3.7%.

Furthermore, the Commission expects the budget deficit to reach 3.5% of GDP this year, down by 0.1 percentage points against the previous forecast of 3.6%.

The structural budget deficit will reach 3.9% in 2017 and 4% in 2018.

Despite the strong GDP growth, the debt-to-GDP ratio will grow from 38% of GDP in 2015 to 40.9% in 2018.

The unitary wage draft bill involves a significant risk for tax estimates, with a possible impact of minus 2% of GDP in 2018,” the report reads.

The additional tax incentives planned in 2017 will continue to stimulate domestic demand, but growth is projected to slow down with the dissipation of their temporary effects. As a result, growth will continue to be sustained by consumption, driven by tax cuts and wage and pension increases. Investments will have a modest contribution to growth given the implementation of EU funded projects, the EC report reads.

With regard to annual average inflation, the European Commission expects the return to positive territory this year to 1.1% and to reach 3% in 2018.

Inflation will gradually return to 2.5% +/- 1 percentage point range of the National Bank due to strong domestic demand, to additional wage increases and additional incentives, the EC anticipates.

The main risk for prospects is the possibility of adopting new incentive measures to fuel domestic demand on short term, to the detriment of the sustainability of public finances.

The postponement or absence of structural reforms to boost competitiveness could have a negative effect on exports, thereby worsening the external balance, the Commission notes.

In April, the IMF improved its forecast on the Romanian economy’s growth to 4.2%, from the previously projected 3.8%, but the growth is still below the 5.2% anticipated by the government. For 2018, the IMF expects the GDP growth to reach 3.4%.

The government expects a budget deficit of 2.99% of GDP in 2017.

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