Ramona Jurubita, KPMG: The climate change transition has a large impact across a number of dimensions which will affect businesses

In an insightful dialogue featured in the “Industries to watch in 2024” cover story of the February edition of Business Review Magazine, Ramona Jurubita, Country Managing Partner at KPMG Romania & Moldova, shares her expert insights into the economic landscape of 2024. With a year packed with significant elections, Jurubita outlines the dual-edged sword of opportunities and challenges that lie ahead for Romania’s economy. She underscores the critical need for a balance between stimulating public spending and maintaining fiscal discipline to avoid exacerbating the public budget deficit amidst economic slowdowns and tax hikes.

In 2024, we will see several elections- for the European Parliament, then continuing with local, general and presidential elections. In this context, there may be certain macroeconomic risks, such as over-emphasis on policies which aim to stimulate demand. There is likely to be a temptation for public spending insufficiently balanced by tax revenue, which would lead to an increase in the public budget deficit, already a cause for concern as a result of the deceleration in economic growth as well as the impact of tax increases on companies’ activities and also on household consumption. It is to be hoped that the authorities will resist short term electoral pressures and focus on economic policies which are sound in the long term.

Moreover, the external environment remains uncertain, the main issues being the continued conflicts in Ukraine and the Middle East and the threat to shipping in the Red Sea. These could place higher costs on trade, raise commodity prices, disrupt supply chains and lead to higher than anticipated inflation. However, economic growth could be helped by an effort to absorb EU funds, including those available via the Recovery and Resilience Facility. This provides an opportunity to implement policies that will advance the green transition, including investments in digitalisation, green energy and infrastructure. At the same time, the efficiency of the public sector and state owned enterprises could be improved through the enactment of long-awaited governance reforms.

During election years some sectors exhibit increased volatility due to the impact of short term economic policies. However, the underlying economic trends usually matter more. According to the current budgetary allocations, the authorities plan to spend an increasing amount on infrastructure investments in 2024. As a consequence, the construction sector – including the majority of subsectors which relate to it – could see a healthy level of activity this year. Manufacturing presents possibilities for a positive 2024, largely due to the so-called base effect, following poor performance in 2023. This will depend to a large extent on continued buoyant activity in subsectors such as the manufacture of motor vehicles, electrical equipment as well as of computer and electronic products. Turning to services, retail, especially related to food items, could still perform well in 2024 given the expected increase in nominal wage growth and the relative moderation in global agricultural prices. Other service sectors, such as information technology and communications could perform well too, impacted positively by both the 2024 elections and the objectives set out in the national energy and climate plan.

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The climate change transition has a large impact across a number of dimensions which will affect businesses. These range from changes in legislation, product design and specifications or market demand changes, the latter triggered in part by shifts in consumer behaviour. Given the climate change objectives set at national level, most companies will need to increase investment rates significantly over the next few years to be able to reduce carbon emissions and thus lower the potential amount of carbon taxes they pay. The EU’s introduction of a carbon border tariff for some items such as steel, cement and other goods in 2026, can be expected to have an impact on input costs for products which cannot be produced more cheaply in the EU. Some companies could be faced with stranded assets as these become costlier to operate as a result of low carbon transition. Some might also face higher costs in raising capital if their climate change transition plans are perceived as lagging behind by investors.