Romania’s PM bullish expectations may put fiscal consolidation at risk

Romania’s PM bullish expectations may put fiscal consolidation at risk
By Iulian Ernst in Bucharest July 20, 2021

On a highly optimistic note, Romania’s Prime Minister Florin Citu announced that this year’s economic growth could hit 10%, driven by investments (as opposed to consumption) — a scenario that remains on the optimistic side yet reflecting the broad optimism shared by analysts.

The 4.3% growth, assumed by the government when drafting the budget, needs an update under the mid-year budget revision, but if realistic and cautious this is going to be more in the region of the 7.4% figure mentioned by the European Commission this July. Any more optimistic assumption used as grounds for a budget revision would put at risk the fiscal consolidation that is anyway planned at a mild intensity in 2021.

The government is expected to carry out a budget revision in mid-August and the prime minister’s statements may be interpreted as heralding such a sharp revision to the GDP growth forecast. His statements should, however, be interpreted in a political context, as he is running for the top position in the National Liberal Party (PNL).

In the latest forecast dated April 26, the state forecasting body envisaged 5% GDP growth for 2021.

While there are grounds to expect an upward revision of the projection, the prime minister’s focus on investments as the major growth driver is not yet supported by data. And such a scenario is unlikely before the absorption of funds under the Relaunch Plan, most likely early next year.

The National Bank of Romania (BNR), itself more optimistic and ready to revise upward its projection for this year’s growth, stresses that consumption remains the main growth driver so far.

“From the perspective of annual changes, the recovery had continued to be driven by domestic demand and household consumption had become again the major determinant, mainly due to the strong revival of purchases of goods, but especially of services, in the context of the easing of mobility restrictions. In turn, the gross fixed capital formation had made a slightly higher positive contribution to annual GDP dynamics,” according to the minute of the latest monetary board meeting of the BNR.

GDP will grow in Q2 and Q3 at quarterly paces faster than envisaged in the latest forecast drafted in May, yet decelerating from the sharp rise seen in Q1, according to the minute.

Romania’s GDP increased by 2.9% in Q1 compared to Q4 last year, in real (comparable prices) and seasonally adjusted terms.

“The economic activity is expected to increase further during Q2 and Q3, posting quarterly dynamics somewhat faster than anticipated in May, although decelerating gradually versus Q1,” according to the minute.

On the downside, the BNR warned that those prospects render likely the widening of the positive output gap (hence generating more inflationary pressures) at mid-2021 to a visibly higher value than that indicated by the May medium-term forecast.