According to OTP Bank analysts, the economic recovery will slow substantially in 2022, as the GDP growth is estimated to stay below 2% this year as inflation erodes real income, monetary policy tightens and supply chain problems could further develop.
Considering the economic recovery performance, data shows that Romania has exceeded its pre-virus level but was roughly 2% below the pre-virus trend by the end of the second quarter in 2021. However, in the second half of last year growth substantially slowed and by the last quarter of 2021 the economy already stagnated on a QoQ basis.
Going further into sectorial analysis, agriculture and industry substantially weakened for Q4, while growth in market services (which is the biggest sector) slowed on account of the sharp delta pandemic wave and base effects.
“In regional context, during the last months of 2021 Romania went back from the second to the fourth best performing country in the CEE region after Serbia, Poland and Hungary if compared to the pre-virus GDP level. At the same time, data for January-February suggest mild improvements, while the Russia-Ukraine conflict deteriorates the outlook. Although trade ties are moderate, higher energy prices, slower euro area growth and the increasing risk premium will take its toll on activity and will fuel the increase of inflation”, said OTP Bank analysts. As it follows, Romania’s outlook on economic growth for this year will be below average compared to regional peers, while the need for fiscal consolidation is more dire that in other CEE countries, due to the fact that Romania is under Excessive Deficit Procedure.
So far, inflation continued to grow steadily, and driven by energy and food price shocks it reached 8.5% by February, while core inflation remained at 5,2%. Given the fact that the local market entered the COVID crisis with a liberalized energy market, the 2021 household energy price increase had a larger direct effect than in the region and the contribution to the aggregated inflation varied from month to month given the accounting of the energy price cap measures.
“Since the Government has put a cap on energy prices for the next year, we don’t expect another regulated energy price hike until next spring. At the same time energy costs for companies could still increase, and the Russia-Ukraine conflict will add to pressures on food prices. Going further, we foresee an inflation peak at 9.5% for April-May, with a good premise for a gradual decline afterwards”. To fight this situation, the central bank has followed through with 50 bps base rates hikes, the last increase taking place at beginning of April.
Alongside other monetary policy tightening measures, the National Bank of Romania will likely continue this path, so that the base rate could reach the 4,5% threshold by the end of the year.
In the larger macroeconomic picture, employment had gradually recovered after the covid crisis and the general wage growth has strengthened slightly in the last months of 2021, even though inflation has taken a serious bite out of the real purchasing power. A significant spill over could complicate the anti-inflation efforts of the central bank, while other macroeconomic indicators continue to worsen. The current account will continue to be affected by the increase in energy prices, as Romania is a net energy importer. Since the twin deficit continues its downward trend, and it is certain that the external balance for the next two years will be negatively impacted, the need for fiscal consolidation is even more important.
“We estimate a gradual fiscal consolidation in line with the adopted convergence program, but also expect some slippages compared to the plans, given increasing energy subsidies proposed tax cuts and slowing growth. In our current forecast, government debt could increase to 55% of GDP by 2023.”
Given global and regional developments, we see risks regarding GDP growth to the downside, while the inflation and interest rate outlook are subject to upside risks.