EU expects Romania’s growth drivers to shift from net exports to domestic demand

By bne IntelliNews November 6, 2013

The EU expects the domestic demand for consumption and investments to drive Romania’s growth to 2.1% in 2014, after net exports push up the country’s GDP by an estimated 2.2% y/y this year, according to the 2013 Autumn Forecast. Further rise in private consumption and the continuation of investments would further accelerate the growth to 2.4% in 2015, the EU projects.

The forecast is based on certain optimistic assumptions. Investment would regain momentum supported by better absorption of EU funds as major infrastructure projects are expected to gain traction. The forecast does not include precise expectations for the absorption rates in the coming years however. Similarly, the EU assumes that the private consumption would pick up on the back for improving consumer confidence.

Domestic demand’s contribution to GDP growth will shift from negative 0.3pps in 2013 to positive 2.2pps in 2014 and 2.7pps in 2015. Net exports’ contribution on the opposite will weaken from positive 3.5pps in 2013 to negative 0.1pps in 2014 and negative 0.3pps in 2015.

Fiscal consolidation is expected to continue mildly in the coming years, but risks are related to i. less tax-rich growth associated with domestic demand  ii. renewed accumulation of arrears especially at local level and iii. limited progress in restructuring of state-owned enterprises resulting in renewed progress to budget. All these risks are not negligible but rather relevant. The ESA deficit would shrink from 3%-of-GDP in 2012 to 2.5%/GDP in 2013 and 2%/GDP-possibly 2.2%/GDP including extraordinary co-financing of EU-funded projects, in 2014. The structural deficit is forecast to mildly improve over the forecast horizon from about 2% in 2013 to 1.5% in 2015.

In response to stronger domestic demand, the Current Account deficit is seen as slightly widening from 1.2% of GDP in 2013 to 1.8% of GDP in 2015.

Inflation is projected to decelerate further to an average of 2.5% in 2014 as falling food prices are expected to drive it to historical lows in the first half of 2014. In 2015, inflation is set to average 3.4% given the steady recovery in domestic demand and the on-going price convergence towards the EU average.

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