|
Forecasts for Romania |
2010 |
2011 |
2012 |
2013 |
|
GDP growth (%, yoy) |
-1,6 |
2,5 |
1,4 |
2,9 |
|
Inflation (%, yoy) |
6,1 |
5,8 |
3,1 |
3,4 |
|
Unemployment (%) |
7,3 |
7,4 |
7,2 |
7,1 |
|
Public budget balance (% of GDP) |
-6,8 |
-5,2 |
-2,8 |
-2,2 |
|
Current account balance (% of GDP) |
-3,9 |
-4,1 |
-5,0 |
-5,0 |
ROMANIA Recovery continues to be driven by domestic demand
2011 growth exceeds expectations
After two years of negative readings and a cumulated GDP contraction of more than 8%, growth resumed in 2011 with the economy growing slightly above potential by 2.5%. Growth was mainly driven by a robust increase in industrial output and an exceptional agricultural harvest. On the demand side, the main drivers of growth were gross fixed capital formation and, in the second half of the year, a modest recovery in private consumption.
Growth in 2012 to slow down but to remain supported by investment
For 2012, real GDP is projected to grow by 1.4%, with domestic demand expected to be the main growth factor. Although households and corporates are expected to continue to adjust their balance sheets during the first half of 2012, the continued improvement in employment, coupled with lower inflation, should support real disposable income. This should also contribute to a revival of private consumption during the second half of 2012. Investment is expected to be an important driver in 2012 given the country’s need to modernise its public infrastructure, partly with the co-financing from EU funds. Due to the financial market uncertainty, some of the investments initially planned for early 2012 are likely to be delayed to the second half of 2012 or 2013. As in 2011, credit activity is set for a modest increase in 2012, as households and credit institutions continue to repair their balance sheets.
External demand is expected to continue to contribute negatively in 2012 due to the worsening economic outlook for the EU which accounts for about 70% of Romania’s exports. Weaker external demand will depress export growth, while imports will decrease less, being supported by domestic demand. The resulting increase in the trade deficit will lead the current-account deficit to widen to 5.0%. For 2013, GDP growth is estimated to accelerate to 2.9% as domestic demand recovers. The balance of risks to the 2012 growth baseline scenario remains tilted to the downside although risks become more balanced over the medium term. Downside risks include additional needs to repair household balance sheets, coupled with tighter credit standards for consumer lending that may result in lower-than-currently-forecast private consumption. Upside risks include a stronger contribution of investment from higher EU funds absorption and of domestic demand linked to possible pre-electoral fiscal slippages.
Labour market remained subdued but is expected to improve over forecast horizon
The labour market remained subdued in 2011: according to the Labour Force Survey (LFS), the unemployment rate for the age group 15-74 remained at 7.4% in 2011. Alarmingly, young people remain a particularly vulnerable group as the unemployment rate for employees below 25 years continued to increase and reached its highest level of 25.4% (LFS) in the last quarter of 2011. The overall employment rate remained low in 2011 at 58.5%. Unit labour costs have declined by 3.7% in 2011, enhancing the competitiveness of the economy. Labour market conditions are expected to improve over the forecast horizon with unemployment forecasted to decrease to 7.2% in 2012 and to 7.1% in 2013.
Inflation to remain within the NBR’s target range in 2012 and 2013
Upside risks to the inflation outlook remain, although price pressures receded significantly in 2011. HICP inflation fell sharply to 3.2% in December 2011, close to the mid-point of the national central bank’s (NBR’s) target range of 3.0% ± 1 pp. set for end-2011,(36) amid a favourable VAT-related base effect and easing food prices. HICP inflation continued to recede and fell close to the euro-area level in the first quarter of 2012 averaging 2.7%, partly on account of a favourable base effect from higher food prices a year ago. As the temporary downward pressure on headline price indices stemming from volatile commodity prices gradually reverses going forward, inflation is projected to increase but to remain within the NBR’s range for end-2012. Over the medium term, risks to the inflation outlook are tilted to the upside due to as-yet uncertain prospects of further increases in administered energy prices. Conversely, a slower-than-expected economic recovery would have disinflationary effects.
Fiscal consolidation to continue
The general government deficit decreased from 6.8% in 2010 to 5.2% of GDP in 2011, but it would have been significantly below 5% without the inclusion of a substantial one-off item, worth 1.1% of GDP, due to payment obligations related to court decisions which became definitive in 2011 and are applied retroactively.
The deficit is expected to come down to 2.8% of GDP in 2012. The measures implemented by the authorities to continue fiscal consolidation include: (i) a freeze in public wages and further employment cuts in the public sector; (ii) a pension freeze; (iii) the introduction of a new social assistance code; (iv) excise rate hikes for cigarettes and diesel; and (v) an increase in royalties for the use of resources necessary to produce construction material. For 2013 the budget deficit is expected to fall to 2.2% of GDP under a no-policy-change assumption. The structural balance is expected to improve further over the forecast horizon, from a deficit of 3.3% of GDP in 2011 to a deficit of 1.2% of GDP in 2013, as a result of continued fiscal consolidation. The debt-to-GDP ratio is expected to stabilise in 2012-13 at 34.6% after several years of rapid growth due to the economic crisis.