Romania will register a spectacular growth rate this year, the Winter Economic Forecast recently issued by the European Commission shows.
Romania’s economic growth is forecast to peak in 2016, with a growth rate two times higher than that reported at EU level, new estimates issued by the European Commission show. Also, the GDP is expected to increase by 4.2%, mainly due to pay hikes and fiscal relaxation. “Real GDP growth in the third quarter of 2015 (3.6%) was surprisingly strong”, registering “its highest growth rate since 2008”, the Commission underlines. Next year, “GDP growth, however, is expected to remain above potential at 3.7%”.
Domestic demand is set to remain the driver of growth, whereas net exports' contribution to growth is projected to remain negative over the forecast horizon.
European experts underline however that there are major downward risks to the macroeconomic outlook, such as the potential implementation of the law on debt discharge as initially approved by Parliament. The application of the law on the current stock of loans could have a negative impact on credit growth, consumer and investor confidence, and domestic demand. In another move, upward risks could come from a better-than-expected absorption of EU funds and a higher multiplier effect from the fiscal stimulus in 2016 and 2017.
Despite robust economic growth, the headline deficit is set to rise significantly within the forecast horizon, and the structural deficit is forecast to increase from 1% of GDP in 2015 to 4% in 2017.
In exchange, private consumption is thriving, investment has sustained its upward trend and the economic sentiment indicator reached a seven-year peak in the third quarter of 2015, pointing to continued momentum.
“The minimum wage hike is likely to exert upward pressure on prices”, with the annual average inflation forecast to reach -0.2% in 2016. “As the impact of the VAT cuts fades out and the output gap closes, inflation is set to return to positive territory in the second half of 2016.”
The unemployment rate is projected to fall from 6.7% in 2015, to 6.6% this year and down to 6.5% in 2017, no major changes being reported as compared to the previous outlook. Most likely than not, the unemployment rate will further follow a downward trend, against the backdrop of a significant economic growth. Conversely, employment is projected to grow over the forecast horizon.
“The 19% increase in the minimum wage in May 2016 is expected to lead to higher unit labour costs overall. The wage hike will partially offset recent gains in productivity, thereby weighing on competitiveness”, the European experts also note. The Winter Economic Forecast issued by the European Commission is similar to that released by "Coface”, a company specialising in credit risk management consulting services, which estimates a 4.2% growth rate for Romania this year. A possible problem identified by the company’s analysts is a potential increase in payment incidents. The apparent contradiction is generated by the economic growth, which will further be boosted by consumption, but this does not rely on a solid base, however, Coface writes.
(Translated and edited by Diana Vijeu)