European Commission: Increased unpredictability of the business environment in Romania may have a negative knock-on effect on investments

Anca Alexe 07/02/2019 | 14:14

The economic boom that began in Romania in 2017 eased in 2018. Real GDP growth eased from 7 percent in 2017 to 4.3 percent annualised in the first three quarters of 2018. For the year as a whole it is estimated at 4 percent, the European Commission writes in its Winter 2019 Economic Forecast for Romania.

“The slower pace of growth was due to private consumption, as the effects of tax cuts implemented in 2017 faded away and inflation weighed more heavily on real disposable income. Nonetheless, private consumption growth remained strong as a result of the tight labour market and rising wages.

Investment growth is likely to show a significant decrease in 2018, following contractions in the second and third quarters. According to preliminary data, inventories contributed 2.8 pps. to GDP growth in the first half of 2018.

If confirmed, this build-up of inventories may explain the subdued level of private investment in 2018.

Net exports contribution to GDP growth turned more negative in 2018, with both imports and exports declining. Consumption goods were the main drivers of import developments. Exports decelerated on the back of more sluggish external demand and an appreciation of the real effective exchange rate.

Real GDP growth is forecast to further decrease to 3.8 percent in 2019 and 3.6 percent in 2020. The composition of growth is expected to remain fairly stable, with private consumption still the main driver.

The evolution of investment in 2019 will largely depend on the impact of policies introduced in December 2018 concerning the banking, energy and telecommunications sectors.

The contribution of net exports is expected to remain negative but progressively less so in 2019 and 2020. Risks to the forecast are clearly on the downside.

Besides a potential negative impact on credit, the impact of the government’s emergency ordinance in December could have a much broader effect. For example, significantly increased unpredictability of the business environment in Romania may have a negative knock-on effect on investment decisions.”

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