A look at economic forecasts and results in 2016.
According to the winter economic forecast the European Commission has recently made public, Romania’s economic growth will reach a peak of 4.2% in 2016, thanks to significant pay rises and fiscal relaxation. However, a slight downturn will be reported, the growth rate standing at 3.7% for 2017, the aforementioned forecast has also revealed. The European Commission has revised upwards the forecast for Romania’s economic growth in 2016 as well as in 2017, given that last fall the Commission’s forecast indicated a 4.1% growth rate for 2016, while the growth rate for 2017 stood at 3.6%. Business analyst Aurelian Dochia points out the factors triggering the economic growth in 2016 and 2017.
Aurelian Dochia: ”The European Commission is well aware of these factors and has also highlighted them. It’s all about the measures targeting tax and duty reduction and the wage increase. And that is how over the past year as well as in 2016 in Romania the purchasing power has soared up, which translates in a growing demand, in turn entailing an increased production and a higher Gross Domestic Product. Indeed, in 2016 Romania’s economic growth rate across the European Union is second only to the rate reported by the Republic of Ireland, but I want you to notice something important. Apparently, the reported growth rate is not sustainable because, just as the European Commission forecast, in Romania in 2017 the growth rate will again see a slight downturn, from 4.2% to 3.7%, which means that the impetus the growth rate has seen is somewhat artificial. It also triggers a certain imbalance, for instance the public budget deficit will grow in 2016, but especially in 2017, when it is estimated to stand at 3.8%, thus exceeding the 3% target imposed by the European norms, Romania is in danger of again entering the excessive deficit procedure, the public debt will also grow, so by and large 2016 indicates a peak growth rate which to a great extent is a debt-based growth, so to say.”
Recently, the National Statistics Institute has made public the fact that in 2015, Romania’s economic growth rate stood at 3.7%.
Aurelian Dochia: ”Just as for the European Union’s forecast, for 2015 as well, the aforementioned factors were operational, that is the tax and duty reduction and the pay rises. We should not forget, those factors started to become active more than a year ago, when the Government took the necessary steps to increase the national minimum wages, to restore the public sector employees’ wages that had previously been slashed. It was a series of steps triggering an increase in the incomes of the population, and such a growth translated into a higher consumption rate. The process will still be running in 2016, but on a longer term, as I was saying, it no longer looks sustainable, this factor needs to be replaced by something else. “
In turn, the chief economist of the National Bank of Romania, Valentin Lazea, shares the opinion that our country must decide if it wants to be a competitive exporter or a market for foreigners. Valentin Lazea explained that, in keeping with the decision taken, appropriate economic policies would also have to be selected, since there is a significant difference between a fiscal policy targeting the VAT reduction, a monetary policy targeting the strengthening of the national currency and an almost stagnant structural policy, all that with the clear aim of boosting consumption, on the one hand, and on the other hand a fiscal policy targeting a cut in the contribution to social security funds, which is set to give production an impetus, a monetary policy pursuing a slight decrease in the exchange rate in order to support exports as well a structural policy which aims to go ahead with reforms and improve the administrative capacity.
Aurelian Dochia: ”If the domestic production capacity is unable to meet the increasing consumption demands, then the external deficit will grow, and will have to be financed through an increase of the debt, the public as well as the private one. Secondly: stimulating a country like Romania, with its current economic level, may run the risk of having Romania fall into the trap of the so-called middle income, a trap most of the countries fall which have a per capita income of around 10,000 dollars, countries saying let’s relax, we’ve been through so much pain already.’ The third problem arising from this consumerist attitude is the fact that stimulating consumption when you have a deficit in demand, just as it was in 2009 and will still be by the second quarter of this year, is strikingly different from encouraging consumption when you pass on from a deficit in demand to excessive demand, which is what we’re going to have in Romania beginning with the third quarter. Whenever we have excessive demand, then the aftermath is inflation flaring up again and/or the increase of imports.”
The chief economist of the National Bank of Romania, Valentin Lazea, explains that the countries whose economic progress has been export-based have overcome the global crisis easier, also avoiding falling into the middle income trap. The good news for Romania is related to the high rate of the country’s integration in the European Union, the fact that Romanian capital still prevails in domestic economy, that more than 55% of direct foreign investment in Romania covers economic areas with a potential for export. Also, a significant part of Romania’s exports lies with medium to high-ranking technologies.