Real GDP growth is projected to remain strong, on the back of fiscal easing and wage increases. Unemployment fell significantly in 2016 and is expected to remain at a low level in 2017 and 2018. With a positive output gap, inflation is set to pick up. The budget deficit is projected to continue increasing due to tax cuts and higher public spending. The draft unified wage law poses a significant downward risk to the fiscal forecast.
Growth is accelerating
In 2016, GDP growth rose to an eight-year high of 4.8%, driven mainly by consumption, which was boosted by pro-cyclical fiscal policy and wage hikes. Private consumption, which rose to a nine year high, and a notable increase in inventories contributed strongly to growth. Investment, by contrast, contracted as public investment fell due to a slow uptake of new projects financed by EU funds under the 2014-2020 programming period.
The contribution to growth from net exports was also negative, on the back of strong consumption growth, as import growth outpaced that of exports.
Consumption to remain the main growth driver
The output gap closed in 2016 and growth is projected to remain above potential in 2017-2018. The additional fiscal stimulus planned in 2017 is projected to continue to boost domestic demand but growth is forecast to slow as the transitory effects of the fiscal impulse wear out. Accordingly, growth is expected to remain consumption driven, boosted by tax cuts and increases in public wages and pensions. Investment is forecast to make a modest contribution to growth as the implementation of projects financed from EU funds gradually picks-up.
The labour market continued to improve in 2016 on the back of strong real GDP growth. Unemployment dropped to a historical low in 2016. Low unemployment, combined with a shrinking labour force and persistent skills shortages, led to a tighter labour market and economy-wide wage increases. Total employment decreased in 2016 as the decline in self-employment more than offset the increasing number of employees. Total employment is set to grow at a moderate pace in 2017 and 2018, driven by strong growth, while the unemployment rate is projected to continue declining.
The fiscal stance remains expansionary
In 2016, the general government deficit rose to 3.0% of GDP, from 0.8% of GDP in 2015. Tax cuts, particularly the four percentage point cut in the standard VAT rate, had a negative effect on tax revenues. On the expenditure side, public wages rose considerably.
In 2017, the general government deficit is projected to further deteriorate to 3.5% of GDP. The standard VAT rate was cut by an additional one percentage point and the extra excise duty on fuel and the special construction tax were abolished. The 2017 budget contains large increases of public wages and social benefits, including an additional pension increase of 9%, on top of the standard indexation, which is scheduled for July 2017. The deficit is projected to further widen to 3.7% of GDP in 2018.
As a consequence of fiscal easing, Romania’s structural deficit is forecast to increase from around half a percent of GDP in 2015 to around 2½% in 2016 and 4% in 2018. Despite strong GDP growth, the debt-to-GDP ratio is thus projected to rise from 38% of GDP in 2015 to 40.9% in 2018
The draft unified wage law poses a significant risk to the fiscal forecast, with a potential impact on the general government balance of up to -2% of GDP in 2018. Its final form and schedule was not known at the cut-off date of this forecast.
The European Commission publishes macroeconomic forecasts for the EU and its member countries three times a year, in spring (May), autumn (November) and winter (February).
For more information: Spring 2017 Economic Forecast – Romania