The European Commission, the executive arm of the EU, forecasts the local economy will grow by 4.2 percent of GDP this year, as the cut in VAT and rise in the minimum wage are going to boost consumption.
Moreover, the EC points out in its latest European Economic Forecast report that Romania’s economy is estimated to have grown by 3.6 percent of GDP in 2015, this being the highest growth rate since 2008.
The budget deficit is expected to increase to 3 percent of GDP this year after reaching 1.1 percent of GDP in ESA terms last year.
Domestic demand is set to remain the driver of growth in 2016 and 2017. The 4 pps. reduction of the standard VAT rate in January 2016 along with negative inflation and a 19% increase in the minimum wage from May 2016 are projected to boost consumption and push growth up to 4.2% in 2016. As inflation picks up and the fiscal stimulus fades in 2017, consumption growth is likely to slow down. GDP growth, however, is expected to remain above potential at 3.7% in 2017,” said the EC.
Furthermore, the Commission said that public investment growth is set to slow down in 2016 as the absorption rate of EU funds dips before picking up in 2017.
Meanwhile, the private investments will move up on the back of growth in local currency lending and the abolition of the construction tax from 2017.
In a separate chapter, the EC specialists have warned that Romania risks a “major downward risk to the macroeconomic outlook” if the law on debt discharge is implemented in the version initially approved by the Parliament.
“The retroactive application of the law on the current stock of loans could have a negative impact on credit growth, consumer and investor confidence, and domestic demand. Upward risks could come from a better-than-expected absorption of EU funds and a higher multiplier effect from the fiscal stimulus in 2016 and 2017,” added the EC.