ROMANIA ECONOMIC OUTLOOK
Following the publication of Global Outlook – Q2 2017: The upswing is here, we amend our economic forecastsfor Romania.
We revise up our GDP growth forecast for 2017 to 2.8% from 2.2%, reflecting stronger consumer spending thisyear owing to substantial fiscal loosening by Romania’s new government.
We expect 2.4% growth in 2018, roughly in line with Romania’s potential growth rate.
Investment is likely to grow by only 1% in 2017, held back by very low recent EU funds inflow, rising uncertaintyabout the national institutional framework, and the government’s low capacity to fund state-financed investmentprojects.
The government delivered substantial fiscal loosening in early 2017: it cut the standard VAT rate, removed theextra excise duty on fuel, repealed 102 various duties and raised public-sector wages and pensions. Since thegeneral government deficit was already approaching 3% of GDP in 2016, it seems almost certain to exceed theEU-prescribed maximum this year.
Although lower taxes will conceal inflation dynamics in 2017, we think CPI inflation will average 1.6% this year. Asthe impact of tax cuts fades in 2018, we look for consumer prices to grow by more than 3% next year.
Apart from supply-side factors (more expensive fuels and foodstuffs) and higher energy tariffs (gas prices are setto be raised by 5-6% in April), faster headline inflation should be driven by intensifying underlying price pressures.
The economy is operating at full capacity, while labour costs have been pushed up by a hike in the minimum wageand public-sector pay raises.
Owing to the likely inflation spike, we expect the National Bank of Romania to tighten its policy stance this year,with a 25bp rate hike in H2 2017, preceded by a narrowing of the interest-rate corridor.
We also look for 100bp in rate hikes in 2018 to keep the real policy rate close to zero.