Analysis. Beyond GDP: How the Romanian economy gained EUR 18 bln in 2017 and who saw the extra money

Romania’s gross domestic product (GDP) grew by EUR 18 billion last year versus 2016, an impressive result for the second poorest European Union member state. However, almost all the extra money was spent straight away on consumer goods and services and little was invested in development.  Experts warn that Romania’s economic picture is concealing three major risks.

By Sorin Melenciuc

Official data released in March show Romania’s GDP, the index widely used to measure the size of national economies, recorded growth of 6.9 percent in 2017 in real terms, the highest since 2008, to reach RON 858.3 billion (EUR 187.9 billion), from EUR 169.8 billion in 2016. Romania’s GDP last year was larger than Greece’s, estimated at EUR 177.7 billion, for the first time since the 1970s, and ranked 16th among the 28 EU member states.

The impressive GDP growth recorded last year was mainly due to increases in agricultural production, up 18.3 percent compared to 2016, the information and communications sector (10.9 percent), professional, scientific and technical activities (9.9 percent) and wholesale and retail, repair of vehicles, transport, storage, hotels and restaurants (8.2 percent). Construction was the only sector which declined locally in 2017, falling by 0.6 percent compared to the previous year.  “Economic growth has been broadly spread across sectors; only construction did not contribute positively. Services, especially trade, made the most important contribution. The impulse was given by the retail sector, but retail has also boosted upstream sectors, logistics and wholesale, for example,” Horia Braun, chief economist at BCR, told Business Review.

Consumer bonanza

Read more about

One United Properties’ shareholders approve payment of a dividend of €15.2 million

read more

Experts point out that much of the economic growth in Romania is the product of a consumer bonanza, stimulated by years of wage-led growth government policy.

Official data show that household end-consumption expenditure, the index measuring what people spend on goods and services to meet their needs and wants, rose 10.2 in 2017 on the previous year. This benefited retailers active in Romania and employees. The Romanian consumer market increased by more than EUR 10 billion in 2017, to EUR 114.5 billion, due mainly to higher wages paid by employers. The total wage bill rose from EUR 57.7 billion in 2016 to a record level of EUR 67.7 billion in 2017, according to Eurostat data. “We also had an increase in investment last year, but only on the private investment side, coupled with an advance in credit for investment purposes. There was a spike in activity on the residential building side,” Braun comments. In the last few years, the government has adopted a strategy of wage-led growth, stimulating household consumption and GDP growth rates.

In December 2017, average net earnings in Romania grew 11.7 percent year-on-year, to a record high of RON 2,629 (EUR 567) per month. But this model has generated high public spending on wages and pensions and larger fiscal and current account deficits. At the same time, the government has cut public investment, especially in infrastructure projects, threatening economic growth in the coming years.

Major risks to growth

Experts warn that the general economic picture hides three major risks over the coming years. “The first risk is related to the public budget, and we’re already seeing that budget execution is shattering. This situation could lead to fiscal constraints, like tax increases or spending cuts,” Braun predicts. The second risk is an even greater reduction in public investment, at a moment when Romania needs significant public spending, especially on infrastructure. “The third major risk is accelerating inflation. We already have a 5 percent inflation rate, and the problem is that this level is embedded in the expectations of both companies, which are introducing price increases into their budgets, and of unions, which are demanding wage increases to cover inflation. It creates inflationary expectations,” the economist adds. Analysts forecast a slowdown for the Romanian economy in 2018 and 2019. BCR estimates the GDP growth rate will ease to 4.7 percent in 2018, while UniCredit’s economists expect 4.4 percent. The government’s estimate is 6.1 percent GDP growth in 2018.