Romania’s GDP increased by 6.9% y/y in Q4 and 7% y/y in 2017, according to a flash estimate from the statistics office.
Boosted by rampant consumption fuelled by a loose policy mix, the growth rate in 2017 — that was well above potential growth — will fuel inflation and is expected to slow down significantly in 2018.
The government hopes for 6.1% GDP growth in 2018, but more conservative projections such as that delivered by Fitch rating agency this month indicate a possible slowdown to as low as 3.5%.
The policy mix must tighten (higher policy interest rates, more public funds earmarked for investments and fewer to public payroll and consumption) if Romania is to avoid major slippages, with a negative impact on growth. The absorption of structural funds from the European Union and the continuation of the economic recovery in Europe (in Germany particularly) will play a major role in avoiding such pessimistic scenarios.
Under the baseline scenario, the growth rate can only decelerate from such a high growth in 2017. As the monetary policy, and even fiscal policies (despite populist rhetoric), are likely to tighten this year, consumption will decelerate while remaining a major growth driver. The central bank is expected to keep hiking the policy interest rate during the year after the two 25bp each hikes so far. Despite promised wage hikes in the public sector, the government might have to tighten its budgetary policy in order to meet the 3% of GDP deficit target — which in any case is well above the medium term objectives that have been abandoned by the government since it took office in 2016.
Consumer confidence is expected to drop in the first months of 2018 once higher loan interest rates, higher prices and stagnant wages are felt by the population. However, the change is likely to become visible in terms of retail sales no sooner than March and the growth rate might remain robust in Q1.