RECENT ECONOMIC DEVELOPMENTS
Romania’s GDP grew by 4% in the first half of 2018, the sixth highest in the EU. Private consumption remained the main driver of growth, up 4.3% yearon-year (y-o-y), fueled by tax cuts, hikes in minimum and public sector wages, and increases in pensions that boosted disposable income. Investment, up 0.5% (y-o-y), underperformed despite the availability of EU funds. On the production side, information and communications technology (ICT) (up 5.3%) and industry (up 4.3%) were the main drivers of growth. Construction underperformed (down 0.4%), reflecting the sluggishness in the residential segment and the timid recovery in public infrastructure.
Higher disposable income and the pickup in consumption boosted inflation to 5.4% in June 2018. In response to inflationary pressures, the National Bank of Romania increased the policy rate three times in 2018 to 2.5%. This came amid robust private sector credit growth (up 6.8% as of June 2018) and concerns about the perspective of the fiscal stance.
The labor market benefited from the economic growth. Unemployment was close to historical lows at 4.5% as of June 2018, and real wages increased by 8.4% (y-o-y). Nonetheless, the low employment rate at 63.1%, coupled with high youth unemployment at 16.8% as of the first quarter of 2018, reflect persistent structural rigidities in the labor market.
The budget deficit widened to 1.6% of the projected GDP in the first half of 2018, driven by the increases in recurrent expenditure. Increases in public wages and pensions led to a 24.4% hike in the compensation of employees and a 17% increase in current spending. On the revenue side, the reduction of the income tax rate from 16 to 10% starting on January 1, 2018 led to a 21.5% contraction in personal income tax revenues. The impact of these measures was only partially offset by the increase in social contribution revenues (up 36.8%), reflecting the transfer of the social contribution burden from employers to employees.
The economy is projected to continue growing at around potential in 2018, albeit at a slower pace than in 2017. GDP will likely expand by around 4.1% in 2018, driven by the fiscal stimulus and aided by the demand from Europe. Continued growth in consumption is expected to widen the current account deficit to 4.1% in 2018.
The National Bank of Romania anticipates a gradual subsequent decline in inflation to 3.5% at the end of 2018, reflecting a lower contribution from fuel and administrative prices as well as a slowdown in private consumption dynamics, as no further fiscal boost to real disposable household income is envisioned for the rest of the year. However, the recent inflation spikes will push the annual average inflation rate to close to 5% in 2018.
The fiscal measures passed in 2017 and 2018 have put pressure on the consolidated budget deficit. Nonetheless, the Government has stated that, as in 2017, it would be ready to promote adjustment measures should the deficit threaten the 3% ceiling. The widening of the fiscal deficit toward 3% would push public debt to 45.4% of GDP at end-2020 from 43.3% in 2017. Despite this, public debt remains one of the lowest in the EU.
Strong private consumption, aided by the expansionary fiscal policy and continued growth in real wages, partly supported by minimum wage increases, should boost real incomes and lead to further declines in poverty incidence.
The US$5.50 per day (2011 purchasing power parity) poverty rate is projected to decline to 22.3% in 2018, 21.7% in 2019, and 21.0% in 2020.
This is consistent with the trend of the rate for those at risk of poverty or social exclusion (AROPE) for Romania based on the EU’s Statistics on Income and Living Conditions (SILC), indicating that severe material deprivation has decreased significantly.
Last Updated: Oct 11, 2018