Romanian GDP growth bounds ahead of SEE peers, EC forecasts

By bne IntelliNews February 4, 2016

Romania will be one of the fastest growing economies in the EU this year, with only Ireland expected to surpass its expected growth of 4.2% in 2016, according to the European Commission’s Winter Forecast.

Other EU member states in the region, however, will grow more modestly than both CEE powerhouses such as Poland and the Southeast European EU candidate countries, says the report published on February 4.

Growth in Romania is expected to accelerate from the already healthy 3.6% achieved in 2015, driven by wage increases and fiscal relaxation. January’s lowering of the standard VAT rate, followed by a hike in the minimum wage due to come into force in May are both set to boost consumption.

This follows last year’s expansion which was mainly driven by the services sector, as the June 2015 cut in VAT on food caused retail trade to surge, while the IT sector also performed strongly. “Private consumption is thriving, buoyed by higher disposable income and the recovery of local currency lending,” the report adds.

This is in line with the trend across the EU, which has entered its fourth year of growth, with private consumption expected to remain the main driver of growth in both 2016 and 2017, although rates will vary substantially across the 28 member bloc.

Romania’s impressive growth will peak in 2016 and ease to 3.7% in 2017 as the effects of the fiscal stimulus fade, causing private consumption to slow. Growth will, however, remain “above potential” in 2017.

The report also takes a positive view on investment. “Stable investor confidence and continued growth in local currency lending ... should help to sustain private investment growth over the forecast horizon,” the report says. “Public investment growth is projected to slow down in 2016 as the absorption rate of EU structural funds dips before picking up in 2017.”

While Bucharest’s anti-corruption efforts are not mentioned in the Winter Forecast, Romania’s success in tackling corruption is likely to have been a factor in encouraging investment and boosting confidence. Romania’s National Anti-corruption Directorate (DNA) has been extremely active in investigating suspected corruption including by pursuing top government officials.

On the release of the EC’s latest reports under the Cooperation and Verification Mechanism (CVM), which monitor progress on fighting judicial reform and fighting corruption in Romania and Bulgaria, EC first vice-president Frans Timmermans commented on the “professionalism, commitment and good track record of the judiciary and the anti-corruption prosecution and reforms being internalised” in Romania.

By contrast Bulgaria, which failed to adopt an anti-corruption strategy in 2015 and is struggling with judicial reform, has the lowest forecast growth rate in Southeast Europe this year - just 1.5%.

The EC expects public investment in Bulgaria to drop because of a slowdown in projects co-financed by the EU, though it will return to growth in 2017. According to the EC, “… risk aversion, an unsupportive business environment and restrained foreign capital inflows are set to curb investment growth in 2016-17, despite favourable financing conditions and the rise of capacity utilisation in the manufacturing sector back to its historic average.”

However, the picture for Romania is not entirely positive. The report warns that growth will be achieved at the cost of a wider structural deficit and current account gap. It also points to planned legislation in the financial sector that could threaten macroeconomic stability. Specifically, a draft law that would introduce limited liability on mortgage loans poses a major downward risk to the macroeconomic outlook, the report says.

The region’s other EU member states Croatia and Slovenia will expand at above the EU average this year.

The EC has upped its forecast for Croatia’s economy, which is now expected to expand by 2.1%, up from 1.8% in 2015, driven by increasing domestic demand, and remain at the same level in 2017. Household spending will be supported by improving labour market conditions, while investment should gain speed in 2016 and 2017 as the absorption of EU funds improves, according to the EC. On the other hand, exports are expected to moderate in 2016 and 2017 on the back of more subdued competitiveness gains and a slow-down in global trade.

Slovenia’s economy maintained positive momentum in the first three quarters of 2015, with real GDP rising by 2.6% y/y thanks to strong exports and recovering domestic demand. However, the EC has slightly downgraded its forecasts for 2016-2017, and now expects growth to decline to 1.8% in 2016 before reviving to 2.3% next year.

At 1.6%, Serbia’s growth forecast for this year is among the lowest in the region, despite being raised from an earlier projection of 1.4%. However, according to the EC, the decline in public consumption seen during the last three years will wind down by 2017, as fiscal consolidation efforts are reduced. Thus, GDP growth will gradually accelerate on the back of stronger domestic demand.

Other EU candidate countries are expected to grow significantly faster. In 2016, the EC expects Montenegro’s economy to grow by 4.0%, rising further to 4.1% in 2017, with investments and tourism remaining the main drivers. Additionally, the EC expects that private consumption will rise following government’s plan to increase public sector wages and pensions.

Economic growth is also on an upward trajectory in Albania because of surging investment and a positive contribution from net exports. The EC anticipates growth of 3.2% in 2016, rising to 3.5% in 2017, though this is slightly below its earlier forecasts.

Macedonia is expected to grow by 3.3% in 2016 and 3.5% in 2017. The outlook remains optimistic, with investment likely to pick up again once a new government is installed after the April 2016 general election.

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