Romania’s economic growth will slow to 2.2% in 2023 due to inflation that reduces real disposable incomes, tight credit conditions and reduced external demand, according to autumn estimates published on Wednesday by the European Commission, as cited by news.ro.

The European institution expects GDP growth to recover over the next two years to an increase of 3.1% in 2023 and 3.4% in 2024.

With core inflation (excluding energy and food) holding steady, the decline in headline inflation is expected to intensify in 2024 and 2025.

Headline inflation is expected to reach 9.8% in 2023, slowing to 5.9% in 2024 and 3.4% in 2025.

The labor market will remain tight despite weaker economic growth, keeping wage growth high.

The general government deficit is estimated at 6.3% of GDP in 2023, before falling to 5.3% in 2024 and 5.1% in 2025 thanks to fiscal consolidation measures to be implemented in January 2024. The debt/GDP ratio is projected to reach 50.5% in 2025, according to the report.

In 2023, business confidence in the economy, retail sales and services lost significant momentum, and industrial production deteriorated further, according to the European Commission’s country report.

After a strong real GDP growth of 4.6% in 2022, growth is expected to slow to 2.2% in 2023 as tight financing conditions, relatively slow inflation and weak economic growth in trading partners weigh on manufacturing.

Strong increases in wages and pensions are supporting private consumption growth, which is expected to remain positive this year, while government consumption is also expected to accelerate slightly. The tightening of monetary policy and financing conditions led to a sharp slowdown in the growth of private credit, which negatively affected private investment.

However, EU-funded public infrastructure investment provides a powerful stimulus for growth.

Gross fixed capital formation is projected to grow by more than 8% in 2023. The negative contribution of net exports to GDP growth will diminish in 2023, and together with the improving terms of trade, is expected to narrow the current account deficit, which currently stands at around 7.3% of GDP, from 9.3% of GDP in 2022.

Real GDP growth is forecast to accelerate to 3.1% in 2024 and 3.4% in 2025, supported by a strong increase in real disposable income, a weakening of the impact of previous interest rate hikes, and resilience in government consumption and investment.

While private consumption is expected to pick up, investment will remain the main driver of GDP growth over the forecast period.

The current account deficit is likely to remain above 7% of GDP in 2024 and 2025, thanks to significant external financial inflows and a large government budget deficit.

Low unemployment and high wage growth

The situation on the labor market continues to be tense, mainly due to unfavorable demographic trends. The unemployment rate is expected to decline slightly to around 5.4% in 2023 and remain low for the next two years, despite weaker growth.

Nominal wages in both the public and private sectors are expected to grow by double digits in 2023 and continue to grow at a rapid pace in 2024. As such, real wage growth is expected to pick up this year and next.

A long process of disinflation

Lower energy prices are expected to lead to a slow deceleration in headline HICP inflation from around 12% on average in 2022 to just below 10% in 2023, driven by rising food and service prices.

Overall, average HICP inflation will decelerate more rapidly in 2024 and 2025 and eventually return to the central bank’s inflation target range, but there are risks to a more gradual decline.

It is expected that in 2024 and 2025, the state budget deficit will decrease only gradually

Romania’s general government deficit is forecast to reach 6.3% of GDP in 2023, the same level as in 2022.

This is a significant upward revision from the deficit of 4.7% of GDP projected in the spring forecast.

This year’s larger-than-expected deficit reflects higher-than-expected government spending (especially on personnel, goods and services) and slower revenue growth due to weak economic activity.

Public investment as a share of GDP is expected to increase significantly, reflecting ambitious targets for both nationally and EU-funded investment projects.

The cost of measures to mitigate the impact of high energy prices is estimated at 0.3% of GDP in 2023.

The deficit is projected to narrow to 5.3% of GDP in 2024 thanks to the implementation of a fiscal consolidation package worth about 1.2% of GDP.

As for spending, the package includes spending cuts driven by measures to improve the efficiency of public administration and stricter conditions for civil servants to receive vacation and meal vouchers.

In terms of revenues, the new measures are expected to generate additional revenues of 0.9% of GDP.

The main measures include an increase in the taxation of legal entities, the partial cancellation of preferential tax regimes for construction and agriculture, as well as the cancellation of reduced VAT rates for certain goods and services.

The deficit reduction effect of the fiscal consolidation package will be partially offset by a significant increase in personnel costs.

The forecast does not include the potential short-term cost of pending pension reform.

The deficit is projected to narrow modestly in 2025, reflecting the phasing-out of measures to mitigate the impact of high energy prices and the impact of administrative reforms to limit government personnel costs.

Total public debt is expected to rise from 47.2% of GDP in 2022 to 50.5% in 2025, reflecting high deficits and slower nominal GDP growth in the coming years.

Risks to the fiscal outlook are negative. Possible lower GDP growth and increasing pressure on wages in the public sector could lead to an increase in the government deficit.

At the European level as a whole, the autumn forecast predicts GDP growth in 2023 to 0.6% in both the EU and the eurozone, which is 0.2 percentage points below the Commission’s summer forecasts.

In 2024, EU GDP growth is expected to improve to 1.3%. This is still a downward revision of 0.1 percentage point from the summer forecast. In the Eurozone, GDP growth will be somewhat lower – 1.2%.

In 2025, with inflation falling and monetary policy tightening, growth is expected to strengthen to 1.7% for the EU and 1.6% for the eurozone.