The European Commission estimates that Romania’s economy growth rate will decelerate to 4.1 percent in 2018 and 3.8 percent in 2019, as private consumption is slowing down, according to the Interim Summer 2018 European Economic Forecast, released on Thursday.
European experts point out that the Romanian economic boom has started to wind down, after reaching a post-crisis peak of 6.9 percent in 2017.
In the first quarter of this year, the main driver of the slowdown was a contraction in private consumption as inflation weighed more heavily on real disposable income, the economists say.
“Looking ahead, real GDP growth is forecast to decelerate to 4.1% in 2018 and 3.8% in 2019. The composition of growth is expected to become more balanced as private consumption growth tempers and investment strengthens on the back of a pickup in the implementation of projects financed by EU funds,” the report estimates.
In the spring forecast, the European Commission estimated that the Romanian economy will grow by 4.5 percent in 2018 and by 3.9 percent in 2019.
The European Commission considers that tight labour market conditions will continue in Romania over the forecast horizon, with unemployment remaining close to its current very low level.
“Nominal wage growth is expected to continue in 2018, albeit at a slower pace, on the back of further increases in public wages and an additional 9% hike in the net minimum wage as of January 2018. Real wage growth, however, is expected to moderate significantly in 2018, due to the higher inflation,” the report indicates.
The European Commission points out that inflation in Romania turned positive in 2017, despite VAT rate cuts and lower excise duties on fuel, after two consecutive years of falling consumer prices.
“The reversal of the January excise duties cut in October 2017 will exert an additional pressure on inflation in the first three quarters of 2018,” the report says.
The National Bank of Romania has started to tighten its “highly accommodative monetary policy”, in response to the rising inflation, the EC notes.
In 2018 so far the key monetary policy rate was raised by 0.75 percentage point to 2.5 percent.
The European Commission 2018 summer forecast projects for Romania a public deficit of 3.4 percent and 3.8 percent of GDP for 2018 and 2019, above the 3 percent-of-GDP treaty reference value.
In May, the European Commission issued a warning to Romania for significant deviation from the adjustment path toward the medium-term budgetary objective, estimating a risk of a deviation from that recommendation in 2018, and recommends the government to take the necessary measures to limit the growth rate of expenditure.