The growth will continue, albeit at a slower pace than in 2022, due to persistent inflation, strict financing conditions, and low growth of trading partners, according to the latest forecast for Romania published by Eurostat.

It is projected that core inflation will reach its peak in 2023, while overall inflation will remain above the inflation target in the forecast horizon. Unemployment is expected to decrease only marginally, maintaining a relatively tight labor market and high wage increases.

The general public deficit is expected to decrease to 4.4% in 2024 due to strong revenue growth, aided by changes in the tax code and a robust nominal GDP, as well as a decrease in current expenditures as a share of GDP. The debt-to-GDP ratio is forecasted to reach 46.1% in 2024.

Resilient growth despite headwinds

In 2022, the growth reached 4.7%, driven by strong private consumption and robust investments. High-frequency indicators suggest a fairly resilient economy in 2023-Q1, with increasing sentiment and retail sales turnover, and improving industrial production. Hiring expectations have remained relatively high.

In the future, high inflation, strict financing conditions, and slower growth of trading partners are all poised to dampen real growth.

Despite these headwinds, private consumption is expected to remain positive, supported by higher wages and pensions, as well as the extension of the energy price cap until 2025. Government support schemes and a resilient labor market will also support economic activity.

Monetary policy is expected to remain tight, with the policy rate at 7%, affecting the flow of credit to the economy and investments. However, planned investments under the Recovery and Resilience Plan (RRP) and inflows of other EU funds are set to offset more than the impact of strict lending conditions. Investments are expected to strongly support real growth in 2023 and 2024.

Net exports are not expected to contribute to GDP growth. Despite declining energy prices and improved terms of trade, strong domestic demand will maintain a negative trade balance. The current account deficit is expected to remain around [8%] of GDP in the forecast horizon, presenting medium-term external sustainability risks.

Overall, real GDP is estimated to grow by 3.2% in 2023 and 3.5% in 2024. The risks to the forecast are tilted to the downside, as delays in implementing the RRP could reduce investments.

Unemployment and wage pressures

Despite solid GDP growth, labor market prospects remain modest due to an aging population and mass migration, which pose significant obstacles to job creation.

However, the integration of individuals fleeing the war in Ukraine into the labor market and visas for non-EU workers could act as mitigating factors. The unemployment rate is expected to decrease slightly to 5.4% in 2023 and 5.1% in 2024.

Wage increases have been strong, especially in the private sector, but for the overall economy, they remain below total IPC inflation. The tight labor market, the need to compensate for purchasing power losses, and high inflation are expected to contribute to strong wage growth in 2023 and 2024.

Core inflation to remain elevated

The overall HICP inflation reached a peak in November and then decreased to 12.2% in March, mainly due to lower energy prices. Due to the energy price cap scheme, almost no change is expected in this component, largely driven by movements in fuel and energy distribution prices.

However, core inflation continued to rise due to increases in processed food products and services. It is expected to remain above general inflation this year, after reaching a peak in the first quarter. Overall, the average HICP inflation is expected to decrease to 9.7% in 2023 and 4.6% in 2024, but the risks are tilted upwards as wage growth pressures are high.

Estimated decline in the public deficit

Romania's government deficit is estimated to decrease to 4.7% of GDP in 2023, down from 6.2% in 2022. Robust nominal GDP growth and strong energy-related taxes will boost government revenues in 2023.

Current expenditures are expected to increase less than nominal GDP, driven by moderating public sector wages. Public investments as a share of GDP are expected to increase, reflecting ambitious domestic budgetary objectives and large inflows of EU funds.

Additional payments to pensioners, changes in the tax code, compensation schemes to cope with energy price increases, and credible legislation to limit government spending in 2023 are all taken into account in the forecast.

The net budgetary cost of energy support measures is projected in the Commission's spring forecasts for 2023 at 0.3% of GDP, compared to 0.4% in 2022.

The deficit is forecasted to decrease to 4.4% of GDP in 2024 as current expenditures decrease as a share of GDP, due to the discontinuation of some measures implemented in 2022/2023 amounting to about 0.3 pp. of GDP and the effect of automatic stabilizers, as substantial nominal economic growth is expected to continue.

The growth of capital expenditures is expected to slow down due to the base effect created by the large residual amount from the EU budget cycle 2014-2020, projected for 2023. Currently, the Commission assumes a complete elimination of energy support measures in 2024.

Public debt is estimated to decrease to 45.6% of GDP in 2023, due to the deficit reduction and stock-flow adjustment, before rising to 46.1% in 2024. The risks to the fiscal outlook are tilted to the downside.