Romanian economy to shrink by 2.5 percent in 2010, says UniCredit

UniCredit has predicted that Romania’s GDP will shrink by 2.5 percent this year. The bank has issued a macroeconomic update for the country, following the government’s decision to raise VAT to 24 percent. The new scenario incorporates the negative impact of the VAT increase on consumption and indirectly on investments, both of which are expected to be visible in the second half of 2010.

The VAT hike is estimated to directly impact on household consumption and thus generate the 2.5 percent GDP contraction compared to an initial forecast of only 0.9 percent.

According to the same source another immediate consequence will be an increase in the inflation rate.”The Consumer Price Index (CPI) will peak in August above 8 percent y-o-y (7.7 percent y-o-y EOP). We believe the inflation rate will not be able to enter the target band in 2010 and the Central Bank will have to leave rates on hold during the coming months,” reads the UniCredit country prognosis.

Assuming the measures implemented by the government are enough to bring the budget deficit close to the targeted level for this year, the UniCredit report still sees some risk of the budget deficit overshooting as well as weak management of additional structural changes

Simona Bazavan

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