After a strong 2022, Romania’s economy is set to slow down with real GDP growth at around 2% in the coming years due higher inflation, tighter financial conditions and the fallout from Russia’s war of aggression against Ukraine. Inflation is expected to peak at the end of 2022, remaining still high in 2023, before declining in 2024. Unemployment will hover around 5-6%. The general government deficit is set to gradually fall to 4.8% in 2024, driven by strong revenues and a decrease of current expenditure as a share of GDP, mainly on the back of high nominal GDP growth. The debt-to-GDP ratio is set to be at 47.6% in 2024.
Last update (forecast)
Last update (11/11/2022)
|GDP growth (%, yoy)||5,1||5,8||1,8||2,2|
|Inflation (%, yoy)||4,1||11,8||10,2||6,8|
|General government balance (% of GDP)||-7,1||-6,5||-5,0||-4,8|
|Gross public debt (% of GDP)||48,9||47,9||47,3||47,6|
|Current account balance (% of GDP)||-7,5||-9,1||-8,8||-8,4|
Strong slowdown after high growth
In the first half of 2022, the Romanian economy expanded by 5.7% y-o-y. In particular, private consumption and investments grew strongly as pandemic restrictions were lifted allowing pent-up demand to catch-up. In addition, a strong labour market with higher employment and wage growth supported disposable income as did government measures to mitigate the impact of high energy prices.
However, for the second half of 2022 and beyond, the fallout from Russia’s war of aggression against Ukraine, high inflation, monetary policy tightening and the strong liquidity control are all set to slow down real GDP growth signifcantly. Sectors like agriculture, extractive and chemical industry are projected to be particularly affected.
Still, beyond 2022 and due to the expected inflow of EU funds, in particular from the Recovery and Resilience Facility (RRF), gross fixed capital formation is expected to support real GDP growth. Private consumption growth is expected to remain just positive as inflation is reducing households’ disposable income, while government support schemes and a resilient labour market offer some support.
Romania’s economy is not expected to get support from the external sector. In 2022, strong domestic demand is set to widen the current account deficit further to [9.1%]. Afterwards, the cooling of the economy provides a limited improvement, due to a lower demand for imports.
Overall, real GDP is projected to grow by 5.8% in 2022, 1.8% in 2023 and 2.2% in 2024. Risks to the macroeconomic forecast are tilted to the downside as delays in the implementation of Romania’s RRP could reduce investments and growth.
Labour market broadly follows real GDP
Throughout 2022, the unemployment rate decreased towards pre-pandemic levels and is forecast to reach 5.4% on the back of strong economic growth. Despite a slight increase to 5.8% in 2023, the labour market is set to remain tight, supporting strong nominal private sector wage increases. In 2024, unemployment is expected to decrease a bit, in line with the economy.
Inflation to remain high in 2023
The surge in energy and international food prices, has broadedned into core inflation components, and is set to push nominal wages up. Against this backdrop, inflation is projected to remain persistent over the forecast horizon. As the energy support scheme is supposed to expire in 2023-Q3, retail energy prices are likely to increase. Overall, HICP is set to reach 11.8% in 2022, 10.2% in 2023, before falling to 6.8% in 2024.
Public deficit benefits from high nominal GDP growth
Romania’s general government deficit is forecast to decrease to 6.5% of GDP in 2022, compared to 7.1% in 2021. Revenues are set to benefit from solid nominal GDP growth, and from the strong energy-related tax and non-tax revenues. On the expenditure side, public investment is expected to be higher than in 2021, while public wages, social assistance and government purchases are set to rise slower than nominal GDP. The forecast takes into account the measures to mitigate the economic and social impact of high energy prices adopted in April (food vouchers, fuel subsidy) and July (increases in public wages, one-off payment to pensioners), the amendment of the fiscal code and the compensation scheme to deal with the surge in energy prices until August 2023 (which is expected to have a slightly positive budgetary impact excluding the already mentioned economic support measures). The positive impact on revenues from high nominal GDP growth and from the tax administration reform on tax collection contained in the RRP partly offset the upward pressures on deficit from economic and social support measures and from increases in interest payments due to deteriorating market access.
The deficit is forecast to fall to around 5.0% of GDP in 2023, mainly thanks to a decrease of current expenditure as a share of GDP (stemming from the discontinuation of most of the economic and social measures implemented in 2022, about 0.5 p.p. of GDP), and to the effect of automatic stabilisers as nominal economic growth is expected to still be high. Capital expenditure is projected to grow at a sustained pace thanks to the implementation of the RRP, and of other nationally-financed investments. In 2024, the deficit is forecast to decrease to 4.8% of GDP.
The general government debt is projected to decrease to 47.9% of GDP in 2022, 47.3% in 2023, before increasing to 47.6% in 2024.
Risks to the fiscal forecast are tilted to the downside. Uncertainty around the final net impact of the energy measures, lower GDP growth, and the electoral cycle, with elections in 2024, could result in higher budget deficits.