Real GDP growth in Romania is set to pick up above 3% over the forecast horizon, thanks to accelerating private consumption supported by higher real disposable incomes. Financial conditions are expected to ease and public investment to remain robust, but external demand from main EU trading partners is set to be weak in 2024. Inflation is projected to continue declining, but only gradually, and unemployment is expected to remain broadly unchanged. The general government deficit is set to increase to about 7% of GDP in 2024 and 2025, due to strong growth in expenditure. The debt-to-GDP ratio is forecast to reach 54% in 2025.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | 2.1 | 3.3 | 3.1 |
| Inflation (%, yoy) | 9.7 | 5.9 | 4.0 |
| Unemployment (%) | 5.6 | 5.5 | 5.5 |
| General government balance (% of GDP) | -6.6 | -6.9 | -7.0 |
| Gross public debt (% of GDP) | 48.8 | 50.9 | 53.9 |
| Current account balance (% of GDP) | -6.7 | -7.0 | -6.6 |
Strong domestic demand pushes up growth
Economic activity rebounded at the beginning of 2024, following relatively muted real GDP growth of 2.1% in 2023. Private consumption picked up strongly due to increases in pensions and public sector wages. New orders in manufacturing are picking up and business sentiment remains favourable. For the entire 2024, lower inflation, rising real disposable incomes and easing financial conditions are set to support private consumption further. Public consumption remains strong and EU-funded investment in public infrastructure is forecast to continue at a brisk pace. Yet, residential constructions remain depressed, and growth in gross fixed capital formation is projected to slow significantly from 2023 levels. Weak growth prospects in main EU trading partners weigh on exports, while imports are accelerating, leading to a negative contribution of net exports to GDP growth and to a small widening of the current account deficit. Overall, real GDP growth is projected to accelerate to 3.3% in 2024.
The expected further easing of monetary and financing conditions in 2025 should support private consumption despite slowing growth of real disposable incomes. At the same time, uncertainty regarding the path and composition of fiscal consolidation measures may dent business sentiment and private investment. Overall, real GDP is forecast to grow at around 3.1%. More muted domestic demand and a pick-up in exports should reduce the negative contribution of net exports to GDP growth and the current account deficit below 7% of GDP.
High wage increases continue in 2024
The labour market remains tight, but employment declined in 2023 and tensions are easing. This year and next, employment growth is set to turn positive, while the unemployment rate is projected to decline marginally to around 5.5%. Nominal wages are forecast to decelerate in the private sector, barring new high increases in the minimum wage. Public sector wages are expected to grow strongly at a double-digit rate in 2024, before slowing markedly in 2025.
Drawn-out disinflation
After a bump in inflation in early 2024 due to increases in some indirect taxes, the disinflation trend is projected to resume in 2024 and 2025, but on a slightly higher path. Significant increases in wages and pensions put upward pressure on prices and keep the already sticky core inflation at levels well above headline inflation. Average HICP inflation is projected to decline from 9.7% in 2023 to 5.9% in 2024 and 4% in 2025, but risks are tilted towards a more gradual reduction.
The government deficit is projected to remain high over the forecast horizon
Romania’s general government deficit reached 6.6% of GDP in 2023, up from 6.3% in 2022, as government spending continued increasing at a fast pace.
In 2024, the deficit is forecast to increase to 6.9% of GDP. As in 2023, fast growth in current government expenditure is projected to be the main driver behind the higher deficit. Public wages are expected to accelerate strongly this year, reflecting recent discretionary increases in education and health, as well as in the order and defence sectors. The recalculation of pensions in the context of the pension reform will start having a cost already in 2024. Public investment as a share of GDP is expected to remain broadly stable at the high level reached in 2023, due to fast growing capital spending at local level and deployment of RRF funds. Government revenue growth is projected to outpace nominal GDP growth, reflecting a “tax rich” growth composition, efforts to improve tax collection through digitalisation of the tax system, and the impact of revenue increasing measures adopted in the autumn 2023 that will boost government revenue by around 1% of GDP.
In 2025, the deficit is forecast to remain stable at 7% of GDP, based on unchanged policies. The short-term cost of the pension reform is expected to contribute to the higher deficit. However, some moderation in capital spending is likely and growth in current expenditure excluding pensions is expected to slow down. The 2025 deficit forecast does not include the potential additional revenue stemming from the reform of the tax regime of microenterprises and the broad tax reform, which are part of the RRP but are not yet specified in sufficient detail.
General government debt is projected to increase to about 51% of GDP in 2024 and 54% in 2025. Risks to the fiscal outlook are tilted towards higher deficits, especially in 2024 when additional pre-election spending could further increase expenditure.