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December 7, 2022

European Commission: Romania’s economy to contract by 6% in 2020, Gov’t deficit up to 9.2 of GDP

Romania’s economy is projected to contract by 6% in 2020 after many years of robust growth, whereas the general government deficit is forecast to increase to around 9.2% of the GDP in 2020, according to the European Economic Forecast – Spring 2020, published by the European Commission (CE) on Wednesday.

For 2021, the EC estimates that Romania’s economy will rebound, even if not at the level before the crisis, due to a boost of 4.2%.

Wednesday’s European Executive’s forecast is more pessimistic than the previous forecasts, from last winter. Then, the EC slightly revised upwards its estimates regarding the Romanian economy in 2020, from 3.6% to 3.8%.

According to the EC forecast, private consumption, the main driver of Romania’s growth in recent years, is expected to be impacted severely by the lockdown measures. Moreover, uncertainty is expected to hurt investment decisions, however, net exports are projected to contribute positively to growth in 2020, which will start to reverse in 2021.

According to the EC, from a record low of 3.9% in 2019, the unemployment rate is projected to increase to 6.5% in 2020 as some firms will inevitably close as a result of the COVID-19 crisis, although policy measures are expected to limit job losses. Nominal wages are projected to increase only moderately in 2020 after several years of double-digit growth and remain relatively subdued in 2021. Moreover, inflation is projected to fall to 2.5% in 2020 mainly due to the sharp fall in oil prices. Core inflation is projected to ease somewhat but remain above 3% in 2020 and 2021.

Beyond the uncertainty that affects all countries related to the evolution of the health crisis, global growth and international trade, for Romania it will be important how the authorities balance the need for support measures with concerns about the medium-term trajectory of public finance which pre-dated the COVID-19 crisis, according to the EC.

According to the Community Executive, Romania’s general government deficit is forecast to increase to around 9.2% of the GDP in 2020 from a level of 4.3% of the GDP in 2019 and 2.8% of the GDP in 2018. The preexisting expansionary trend largely driven by pension increases is set to be reinforced by the impact of the COVID-19 crisis. The EC says expenditure on old-age pensions is set to rise considerably.

Moreover, Romania’s general government deficit is set to further increase in 2021 to around 11.4% of the GDP under a no-policy-change assumption, despite a projected recovery in tax revenues and phasing out of pandemic-relief related expenditures. This is due to the full-year effect of the 40% increase in pensions in September 2020, an additional upward pension recalculation scheduled for September 2021, and the doubling of child allowance payments.

The debt-to-GDP ratio is forecast to rise from 35.2% in 2019 to around 54.7% in 2022.

The European Commission forecast comes a month after the International Monetary Fund (IMF) revised its estimates on the development of the Romanian economy this year significantly downwards, in the context of the novel coronavirus pandemic. If in October last year, the IMF estimated that Romania would register an advance of 3.5% in 2020, according to the new forecast, the international financial institution expects Romania’s economy to register a contraction of 5% in 2020, and then recover in 2021, when it will register an advance of 3.9%.

The World Bank also estimates that Romania will register an economic growth of 0.3% in 2020, compared to an increase of 3.8% as previously estimated, and a rebound of up to 4.4% shall take place in 2021.

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