The European Commission, the executive branch of the European Union, estimates a slowdown of Romania’s economy this year due to decelerating private consumption and nominal wage growth, according to the “Spring Economic Forecast 2018” released on Thursday.
“Private consumption is forecast to slow down in 2018, as nominal wage growth moderates and inflation increasingly weighs on real disposable income, but will remain the main driver of growth. Investment, however, is likely to further strengthen in 2018 on the back of a pick-up in the implementation of projects financed by EU funds. Overall, real GDP growth is expected to be 4.5 percent in 2018 and 3.9 percent in 2019,” the Commission said.
In the previously released Winter Economic Forecast 2018, the Commission estimated GDP growth rates of 4.5 percent in 2018 and 4 percent in 2019.
The growth rate was spurred in 2017 by expansionary fiscal policy measures including cuts to indirect taxes and public sector pay rises, but with the cost of rising public deficits.
“In 2018, the general government deficit is projected to increase to 3.4 percent of GDP. The unified wage law, enacted in summer 2017, increased gross public wages by 25 percent in January 2018 and contains additional increases for doctors and teachers. (…) The deficit is projected to reach 3.8% of GDP in 2019, driven by increases in social transfers and public investment,” EC estimates.
Moreover, the flat personal income tax rate was cut from 16 percent to 10 percent from January 1, 2018.
The government tried to partially compensate these measures by a shift of social security contributions from employers to employees.
“As a consequence of fiscal easing, Romania’s structural deficit has risen from around 2% of potential GDP in 2016 to around 3¼% in 2017 and is projected to reach around 4¼ % in 2019. Despite strong GDP growth, the debt-to-GDP ratio is thus projected to increase within the forecast horizon,” the report said.