Growth is set to continue, albeit at a slower pace than in 2022 due to persistent inflation, tight financing conditions and low growth in trading partners. Core inflation is expected to peak in 2023, and headline inflation to remain above the inflation target over the forecast horizon. Unemployment is projected to only marginally decline, keeping the labor market relatively tight and wage increases high. The general government deficit is set to fall to 4.4% in 2024, due to strong revenue growth, helped by tax code changes and robust nominal GDP, and to a decline in current expenditure as a share of GDP. The debt-to-GDP ratio is forecast to reach 46.1% in 2024.
| Indicators | 2022 | 2023 | 2024 |
|---|---|---|---|
| GDP growth (%, yoy) | 4,7 | 3,2 | 3,5 |
| Inflation (%, yoy) | 12,0 | 9,7 | 4,6 |
| Unemployment (%) | 5,6 | 5,4 | 5,1 |
| General government balance (% of GDP) | -6,2 | -4,7 | -4,4 |
| Gross public debt (% of GDP) | 47,3 | 45,6 | 46,1 |
| Current account balance (% of GDP) | -8,8 | -7,6 | -7,4 |
Growth resilience despite headwinds
In 2022 growth reached 4.7% driven by strong private consumption and robust investment. High frequency indicators point to a rather resilient economy in 2023-Q1, with sentiment and retail sales turnover increasing and industrial production showing signs of improvement. Employment expectations remained at a relatively high level.
Going forward, high inflation, tight financing conditions and more muted growth in trading partners are all set to slow down real growth. Despite these headwinds, private consumption growth is expected to stay positive on the back of higher wages and pensions, as well as of the extension of the energy price cap until 2025. Government support schemes and a resilient labour market will also support economic activity.
Monetary policy is set to remain tight with the policy rate at 7%, affecting the flow of credit to the economy and investments. However, planned investments under the the Recovery and Resilience Plan (RRP), and inflows of other EU funds, are set to more than offset the impact of tight credit conditions. Investments are expected to strongly support real growth in 2023 and 2024.
Net exports are not projected to contribute to GDP growth. Despite subsiding energy prices and improving terms of trade, strong domestic demand is set to keep the trade balance negative. The current account deficit is expected to stay around [8%] of GDP over the forecast horizon, posing external sustainability risks over the medium term.
Overall, real GDP is projected to grow by 3.2% in 2023 and 3.5% in 2024. Risks to the forecast are tilted to the downside as delays in the implementation of the RRP could reduce investments.
Sticky unemployment and wage pressures
Despite solid GDP growth, employment prospects remain subdued as an ageing population and mass migration pose serious headwinds to job creation. However, labour market integration of people fleeing the war in Ukraine and visas for non-EU workers could act as mitigating factors. The unemployment rate is expected to decline slightly to 5.4% in 2023 and 5.1% in 2024. Wage increases have been strong, especially in the private sector, but for the total economy they remain below headline CPI inflation. The tight labour market, the need to make up for losses in purchasing power, and high inflation should contribute to strong wage increases in 2023 and 2024.
Core inflation to remain high
Headline HICP inflation peaked in November and then decreased to 12.2% in March, thanks to lower energy prices. Due to the energy price capping scheme, hardly any change is expected in this component, mostly determined by movements in fuel and energy distribution prices. Core inflation, however, continued to increase on the back of hikes in processed food and services. It is projected to stay above headline inflation this year, after having peaked in the first quarter. Overall, average HICP inflation is set to fall to 9.7% in 2023 and to 4.6% in 2024, but risks are tilted to the upside as wage increase pressures are high.
The government deficit is projected to decline
Romania’s government deficit is forecast to decrease to 4.7% of GDP in 2023, from 6.2% in 2022. Robust nominal GDP growth and strong energy-related taxes are set to boost government revenues in 2023. Current expenditure is forecast to grow less than nominal GDP, driven by moderation in public wages. Public investment as a share of GDP is expected to rise, reflecting ambitious domestic budget targets and large inflows of EU funds. Additional payments to pensioners, amendment of the fiscal code, the compensation scheme to deal with the surge in energy prices, and a credibly announced legislation to limit government expenditure in 2023 are all taken into account in the forecast. The net budgetary cost of the energy support measures is projected in the Commission 2023 spring forecast at 0.3% of GDP in 2023, compared with 0.4% in 2022.
The deficit is forecast to fall to around 4.4% of GDP in 2024, as current expenditure decrease as a share of GDP, due to the discontinuation of some measures implemented in 2022/2023 amounting to about 0.3 pps. of GDP, and to the effect of automatic stabilisers as nominal economic growth is expected to still be substantial. Capital expenditure growth is projected to slow due to base effect created by the large residual amount from the 2014-2020 EU budget cycle expected in 2023. The Commission currently assumes a full phasing out of energy support measures in 2024
General government debt is projected to decrease to 45.6% of GDP in 2023, due to deficit reduction and stock-flow adjustment, before increasing to 46.1% in 2024. Risks to the fiscal outlook are tilted to the downside. Lower GDP growth, upcoming electoral cycle, possible upside pressures on public wages following negative real growth rates since 2021, indexation of pensions that in 2024 will incorporate the 2022 high inflation, could result in higher budget deficits.