Romania’s economy has slowed, resulting in lower-than-estimated budget revenues, forcing the government to propose some rather unpopular fiscal measures aimed at curbing the deficit. These measures could reduce growth in 2024. The country is facing an economic slowdown that we believe will last until 2024, according to an analysis by ING Bank published on Thursday.

• ING revised Romania’s economic growth forecast for 2023 to 1.5% from 2.5%, based on a somewhat disappointing first half of the year and limited prospects for acceleration in the second half of the year. We also lower the GDP estimate for 2024 to just 2.8%.

• Inflation: We see year-end inflation at 7.1%, slightly above the previous estimate of 6.9%, but still below most market estimates. By the end of 2024, we expect inflation to decrease to 4.0%,

• Discussions about tax reform have been going on for months. Although an official package of fiscal measures has already been proposed, we still do not know the new planned figures for the budget deficit. Based on current information, we estimate that in 2023 the budget deficit will amount to about 5.5% of GDP; should decline to around 4.0% in 2024 and possibly approach 3.0% of GDP in 2025.

• Monetary Policy: We believe that an interest rate cut is unlikely this year, and the start of the easing cycle should take place in the first quarter of next year, with a total cut of 150 basis points by the end of the year. This can be achieved under the condition of gradual strengthening of liquidity conditions on the interbank market. If the disinflation trajectory is disappointing, the likelihood of a longer-term higher rate scenario increases significantly.

GDP growth: from strength to weakness

Annual growth in Romania slowed significantly to an average of 1.7% in the first half of the year, compared to 5.7% for the same period in 2022. Private and public spending were weaker, and as a result, external partners experienced a deterioration in financing conditions. increase in interest rates. Investment in EU-funded public infrastructure projects kept the economy afloat, outstripping private consumption and making the biggest contribution to growth.

On the supply side, with the notable exception of activities related to civil construction, most manufacturing activities and the service sector inhibit production growth.

Weak retail sales in July and a drop in industrial production in Germany support our view that Romania’s economy will continue to slow in the second half of 2023. Weaker-than-expected duty and tax collections could signal that the economy will continue to slow. down

In addition, the higher tax burden and minimum wage increase agreed by the coalition government could be a drag, especially if private consumption continues to be weak, as we expect.

Four rounds of elections next year could slow down the budget consolidation process

In 2024, we believe growth will accelerate, but our forecast remains at 2.8% compared to 3.7% (previous estimate).

On the one hand, we believe that four rounds of elections next year could slow the process of much-needed fiscal consolidation, leading to an overall stimulative fiscal policy. In addition, rising wages will limit the fall in private consumption, while ongoing public investment projects should continue to support activity.

On the other hand, the latest fiscal package could increase downward pressure on inflation and growth and keep interest rates high for longer. In addition, we believe that growth in the Eurozone looks set to stagnate next year, which does not bode well for Romania’s external sector.

Industrial production deteriorated further in the first half of 2023 after an already weak 2022. With two consecutive annual contractions in the first and second quarters, the manufacturing sector (which accounts for about 80% of the index) is currently weighing heavily on economic activity. year.

Looking ahead, we believe industrial activity will remain subdued.

Retail sales rose 2.9% year over year, well below last year’s 5.1% increase. The weak performance in the second quarter contributed significantly to the overall slowdown. Also, with annual growth of just 1.2% in July, retail sales are also off to a weak start in the third quarter.

We believe that the slowdown in private consumption will continue.

The possible negative impact of the new tax package on the labor market and inflation will limit real wage growth, so retail sales growth will remain relatively weak, albeit with higher wages.

In the first seven months of 2023, the trade balance recorded a deficit of 15.6 billion euros, which is 17% less than in the same period last year. The improvements were comprehensive; with the exception of food products, all other categories recorded smaller deficits than in the same period of 2022.

The combination of sluggish GDP growth, below-plan revenues and overspending is never a good thing

On the current account, we see mixed trends in 2023, but overall we see the full-year deficit narrowing to around -7.5% of GDP from -9.3% of GDP in 2022.

Efforts to reduce the budget deficit to below 3.0% of GDP are now waning, and the combination of slower GDP growth, unplanned revenues and overspending is never a good thing. From the middle of the year, it became clear that further measures were needed. At the time of writing, a draft law has been released that contains a variety of measures on both the expenditure and revenue sides, with a heavy emphasis on the latter.

The net fiscal impact should be approximately 1.2% of GDP in the next two to three years. Although we do not currently know the new targets for the budget deficit, we estimate that the budget deficit will be around 5.5% of GDP in 2023; should decline to around 4.0% in 2024 and possibly approach 3.0% of GDP in 2025.

With price pressures once again measured in single digits since July, the downward trajectory of inflation looks set to continue, but may suffer a bit. We now see year-end inflation at 7.1% (versus our previous estimate of 6.9%). By the end of 2024, we expect price pressures to ease to 4.0%

From a monetary policy perspective, we don’t think there will be a rate cut this year. The start of the easing cycle should take place in the first quarter of next year, with cuts of 150 bp. till the end of the year. This can be achieved through a gradual tightening of liquidity conditions in the interbank market, as the current surplus is probably not particularly comfortable for the National Bank of Romania (BNR).

If the downward trajectory of inflation is disappointing, the likelihood of a longer-term scenario of higher interest rates increases significantly.