With inflationary pressures seemingly under control and GDP growth steady, Romania appears to be coping successfully with the economic slowdown. In 2023, absorption of EU funds will be important to maintain the momentum in fixed capital investment to offset the likely slowdown in private consumption, ING economists wrote in the Romania Monitoring report.

Snapshot of Romania’s economy

• GDP: Economic growth of 1.1% in the fourth quarter of 2022 was in line with expectations, bringing full-year GDP growth to 4.8%. We maintain our estimate of GDP growth at 2.5% in 2023 and 3.7% in 2024.

• Inflation: We see that the peak of inflation has passed (16.8% in November). CPI reached 15.1% in January 2023 and we expect a gradual decline throughout the year. We estimate year-end inflation at 7.4%, with downside risks. We do not see inflation returning to the National Bank of Romania’s (BNR) target range of 1.5%-3.5% before two years from now.

• EUR/RON and the key interest rate: Although not in the near future, a rise to 4.95 seems a less distant prospect. When this happens, the next threshold will be zone 5.10. The NBR is likely to keep the key rate at 7.00% until the end of the year, although we do not rule out a small cut before the end of the year.

• Double deficit: For the third year in a row, the current account deficit is increasing, while the budget deficit is decreasing. While we remain cautiously optimistic about the budget deficit forecast below 3% of GDP next year, we are less confident about the current account deficit.

GDP growth: Slowing but still steady and sustainable

In the fourth quarter of 2022, the economy grew by 1.1% compared to the previous quarter and by 4.6% compared to the fourth quarter of 2021. This translates to overall GDP growth of 4.8% in 2022, which is probably one of the best numbers we could have hoped for.

Details on the growth drivers for the fourth quarter (as well as the full year 2022) will be announced on March 8. Available high-frequency data suggest it was a strong quarter for construction, which rose 7.4% compared to the third quarter. Business services also rose by about 2.0%, while retail sales increased by 0.8%. Industrial production lagged behind the rate of reduction by 2.1%.

Looking ahead to 2023, our GDP growth forecast of 2.5% looked optimistic and now seems to be the consensus after many analysts and institutions revised their expectations. We maintain our current outlook and assess that the risks are – dare I say it – tilted to the upside!

While a slowdown in private consumption may be noticeable in the first quarter of 2023 and may even push GDP growth to zero, strong growth in investment activity (likely related to EU-funded projects) should offset this.

In 2022, industrial production decreased by 2.0%.

In 2022, industrial production contracted by 2.0% and is still well below pre-pandemic levels. The data is somewhat distorted by significant fluctuations in the energy sector, in which production declined in 2022 (by more than 9.0%).

The most important component of industrial production – industry, which has a weight of about 80% in the overall index, was only 0.5% lower than the previous year. This result in the manufacturing sector was also distorted by a large drop in production in energy-intensive industries, which were forced to reduce their activities during 2022 (for example, chemical industry -21.6%, production of basic metal -14.8%).

We have relatively little reason to see a stable 2023, although scope for contraction also appears limited. Lower energy prices and weak supply chains should help the recovery.

Retail sales: 5.1% growth in 2022 (adjusted for inflation) sounds good

Retail sales growth of 5.1% in 2022 (adjusted for inflation) in the last quarter sounds good for the domestic consumption picture. With pent-up demand exhausted, consumers settled into a comfort zone with lower but steady sales growth.

Breaking down the numbers, all major categories grew in 2022; food sales by 2.9%, non-food sales by 4.7% and fuel by a relatively surprising 9.8%.

Instead, from 2022 we should begin to see more pronounced effects of negative real wages, effects that will affect consumption.

While we may see positive real wages for all of 2023, we believe this will be a lagged effect and it will be at least one to two quarters before consumers feel more comfortable spending. Until then, caution will prevail.

This doesn’t necessarily mean a reduction in consumption, but at least in the first half of 2023 we could see numbers flirting with stagnation. This is in line with recent surveys that show retailers expect sales to decline over the next three months.

One of the biggest surprises was undoubtedly the construction sector

The construction sector was probably one of the biggest positive surprises in 2022. It was already the middle of 2022 when we were still in doubt whether the sector would stay “green” or shrink in 2022. This was followed by two impressive quarters for both commercial and civil construction, leading to overall sector growth of 10.8% in 2022.

After such an impressive second half of 2022, growth rates can generally be expected to slow down to single digits in the first half of 2023. Across sectors, the outlook looks a little more bleak. On the housing front, we continue to face the same backdrop of higher interest rates and lower mortgage lending

Commercial construction may still grow, but the real hope still lies in civil construction, essentially public infrastructure investment. The budget for 2023 envisages public investment of approximately 7.2% of GDP, which, if achieved, will be a new historical record. The investment plan for 2023, which will amount to just over 5.0% of GDP in 2022, looks very ambitious and could give an additional boost to the construction sector.

Trade balance and current account: The trade deficit has reached a rather impressive value

The trade deficit reached an impressive €34.1 billion in 2022, or about 12.0% of GDP, after widening by 44.0% in 2022 compared to 2021.

Needless to say, €34.1 billion is the largest deficit on record and 12.0% of GDP is very close to the all-time highs of 2007-2008.

While we recognize that the size of the economy has now more than doubled, the continued widening of the trade deficit over the past 8-9 years is worrisome to say the least.

We remain quite skeptical about the prospects for improving Romania’s trade balance. In any case, the improvement will be negligible. The relative normalization of energy markets (also due to the magnitude of external prices) will help to some extent, as well as the economic picture, which should generate better dynamics of exports compared to imports.

Adverse trade balance dynamics remain the main cause of the current account deficit, which widened to around 9.3% of GDP in 2022 from an already high 7.3% in the previous year. Supply chains are blamed in 2021, trade in 2022, but we are seriously concerned about these developments.

In 2023, we expect a correction of the current account deficit to approximately 8.0% of GDP, subject to stabilization of commodity prices and – to a lesser extent – ​​a reduction in the budget deficit. On the latter, while we recognize that the gradual adjustment to the 3.0% GDP target will also help improve the current account, the correlation may be weaker than expected

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