The European Commission’s spring forecast points to a continuing economic recovery in the European Union following its emergence from recession one year ago. Real GDP growth is set to reach 1.6 percent in the EU and 1.2 percent in the euro area in 2014, and to improve further in 2015 to 2.0 percent and 1.7 percent respectively. The forecast rests on the assumption that the agreed policy measures will be implemented by Member States and the EU, taking forward the necessary adjustment.
Regarding Romania, growth is expected to gradually rebalance towards domestic demand over the forecast period, after very strong export growth in 2013, according to europa.eu.
EC appreciates that Romania’s economy beat expectations by growing as much as 3.5 percent in 2013. “Economic growth was driven by a robust industrial output and an abundant harvest feeding strong exports. Growth is set to slow, but to remain robust at 2.5 percent in 2014 and 2.6 percent in 2015. It is projected to remain above potential over the forecast horizon thanks to improved confidence and more supportive international conditions, thereby further reducing the still negative output gap”, said the EC in its report. Structural reforms, such as the liberalisation of energy markets and the new labour code, are starting to bear fruit.
According to EC spring forecast, domestic demand is expected to gradually overtake net exports as the main driver of growth. Investment is projected to regain momentum this year, supported by better absorption of EU funds as major infrastructure projects move ahead.
Private consumption is expected to pick up moderately as consumer confidence improves and disposable income increases on account of higher real wages. At the same time, credit growth, which was in negative territory in 2013, is expected to remain constrained by the ongoing deleveraging of households and banks.
In 2013, the balance of trade in goods and services improved strongly by 4.1 percent of GDP as export growth was strong and import growth remained subdued. “The contribution of net exports to growth is forecast to fade out in 2014 and to turn negative in 2015. Exports are expected to keep growing on the back of an improvement in the external environment, particularly in the EU. However, imports are set to rise over the forecast horizon, alongside domestic demand, outpacing export growth in 2015,” the EC informs. Nonetheless, exports are expected to keep growing on the back of an improvement in the external environment, particularly in the EU.
Inflation to bottom out in H1 2014
Inflation declined significantly in the second half of 2013. This was mainly because of a drop in food prices thanks to a good harvest, a cut in VAT on flour and bakery products, and because of a favourable base effect from high food prices in 2012, the EC notes. Annual average inflation is forecast to decelerate further to 2.5 percent in 2014 amid historical lows in the first half of the year, again thanks to falling food prices. It is set to return to the upper part of the central bank’s target band (2.5 percent ±1 pp.) in the second half of 2014 as the favourable base effect fades and the increase in the fuel excise rate introduced on 1 April kicks in. As domestic demand recovers, inflation is expected to pick up to an average of 3.3 percent in 2015. The rate of energy price inflation remains above headline inflation over 2014-2015.
Downside risks to growth include the effects of faster deleveraging by households and by financial institutions, and a potentially negative base effect from 2013’s record harvest and strong industrial performance. Upside risks would include higher investment induced by better-than-expected absorption of EU funds. Risks to the inflation outlook are balanced over the forecast horizon.
Labour market recovery remains weak
In 2013, despite robust economic growth, the unemployment rate increased somewhat, to 7.3 percent, while total employment went down, largely on the back of a decreased number of self-employed. In both 2014 and 2015, policy measures, especially those targeted at youth unemployment, should start paying off, EC said. Thus, despite a continuous decline in the working age population, the labour force is expected to start growing again on the back of a slowly increasing employment and slightly decreasing unemployment rate.
Compensation per employee is assumed to grow moderately in both forecast years, despite the significant increase in the minimum wage this year. Contrary to 2013, private sector wages are likely to grow faster than public sector wages by 2015.
Fiscal adjustment to slow down
The budget deficit is forecast at 2.2 percent of GDP in 2014. On the expenditure side, the projection takes account of the indexation of pensions foreseen by law, a limited and targeted increase in public sector salaries, and more resources for co- financing EU funds. On the revenue side, the forecast takes into account the inflation indexation of excise duties, the excise-rate hike for energy products, the broadening of the basis for property tax, and the additional social security contributions thanks to a two-step rise in the minimum wage from RON 800 to 900. In 2015, based on the customary no-policy-change assumption, the deficit is projected to decrease further to 1.9 percent of GDP, as revenues improve moderately, in line with the gradual switch towards stronger domestic demand as the main driver of growth. The structural budget balance should improve mildly over the forecast horizon by about 0.1 percent of GDP. Government debt is expected to increase from 38.4 percent in 2013 to around 40 percent in 2014 and to stabilise at that level in 2015. The main risks to the budgetary projections over the forecast horizon are tilted to the downside and mainly relate to expenditure control around elections and tax collection, EC also notes.