With the elections to the European Parliament on June 9, we will have to start a difficult pre-election year. Local, parliamentary and presidential elections should be held in the last four months of the year. Opinion polls point to support for the current coalition after 2024, according to an analysis by Erste Bank on Monday.

With financial uncertainty looming after the election and unplanned fiscal consolidation and structural reforms, markets will be closely analyzing the election results and closely following the polls. An increase in wages and especially pensions should support household consumption, and public investment projects will have a positive impact on the private sector. Thus, we may see GDP growth pick up slightly in 2024, but remain below potential. The decrease in inflation should contribute to the further growth of real incomes.

Fiscal uncertainty is likely to persist until the 2024 general election

We see GDP growing by 3.3% year-on-year in 2024, driven by household consumption, supported by rising wages and investment.

We see downside risks due to weak external demand and lagging private investment, and fiscal uncertainty is likely to persist until the general election in 2024. Romania’s economy has proven its resilience in 2023, and this resilience to shocks will be tested in 2024, when the economy remains virtually without fiscal space.

The economy slowed in 2023, recording GDP growth of 1.4% y/y in the first three quarters of the year, compared to 4.6% y/y in January-September 2022.

In 2024, disinflation will continue, albeit at a slower pace. We expect CPI to reach 5.3% year-on-year at the end of 2024, up from 8.1% in October 2023. We expect slightly higher inflationary pressures early next year due to announced changes in indirect taxation and restrictions on the abolition of some staple food items in February 2024. We do not expect inflation to reach the target range in the next two years.

The lei is likely to remain in the region of 4.97-4.98 lei/euro and reach 5.1 lei/euro at the end of 2024.

We expect the NBI to first cut the key interest rate in mid-2024. The NBI chairman has ruled out discussing rate cuts until inflation has come down significantly and it is clear that the process of deflation is irreversible. At the same time, he suggested that rate cut talks could begin as soon as inflation falls below the key interest rate.

The NDB’s latest forecasts show that inflation is expected to fall below 7.00% in the second quarter of next year, which is in line with our expectation that the key interest rate will remain unchanged at least until the May 2024 meeting, with the risk of a rate cut being delayed until August. We see a gradual 25 basis point rate cut to 5.75% in late 2024.

The exchange rate of the lei against the euro should remain stable in 2024. According to Governor Iserescu, the NBR expressed its dissatisfaction with the strengthening of the lei, which is supported by the inflow of foreign currency, and even decided to intervene and buy the euro. The NBR left liquidity unsterilized, and the deposit line acted as the main tool to discourage speculators with lions. The lei is likely to remain in the region of 4.97-4.98 lei/euro and reach 5.1 lei/euro at the end of 2024.

The political “super-election” year begins with the vote for the European Parliament in June 2024

The coalition between liberals and social democrats is successfully entering its third year. Opinion polls currently suggest the coalition will remain in place beyond the 2024 election, with the Socialists likely to be the main coalition party.

Election results in Romania are quite sensitive to voter turnout, which tends to vary significantly between different types of elections. In summary, we expect the main scenario to materialize, but we are also preparing for possible surprises, given the rather volatile post-communist history of Romanian politics, with rapid changes in voter intentions, Erste analysis shows.

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