January 19 (SeeNews) - Romania's economy will expand by 3.4% in 2017, UniCredit said in its January 2017 CEE Quarterly Report, confirming its previous forecast made in September.
UniCredit projects economic growth of 3.3% in 2018 in Romania, UniCredit said.
The bank estimated that Romania posted a 4.5% Gross Domestic Product (GDP) growth in 2016, up from 4.4% projected in September.
According to provisional data from the Romanian statistical office INS, the country's economy expanded by 4.3% year-on-year in the third quarter of 2016, slowing down from 6.0% annual growth rate in the second quarter.
Romania's national output expanded by a real 3.8% in 2015, compared with a revised growth rate of 3.0% in 2014.
"Lower EU fund inflows and a slowdown in real wage growth could lead to deceleration in domestic demand growth. Exports are unlikely to rebound strongly in the absence of large FDI projects. Inflation is expected to return close to target in late 2017," according to UniCredit.
UniCredit sees Romania's 2017 inflation at 1.6%, while for 2018 the bank expects consumer prices to rise 2.7%.
Romania's annual consumer price deflation decelerated to 0.5% in December, from 0.7% in November.
In its latest inflation report issued in November, Romania's central bank BNR raised to 2.1% its 2017 inflation projection.
"Romania enters a new election cycle with economic growth slowing down and public finances overstretched. The new government led by the Social Democrats (PSD) adopted several fiscal easing measures that add to the ones voted by the previous parliament. While these measures bode well for consumption, they are likely to weigh on growth from the second half of 2017 onwards," UniCredit analysts said.
On Sunday, Romania's prime minister Sorin Grindeanu said he expects the country's economy to grow by 5.2% in 2017, inflation to come in at 1.4% and budget deficit to remain below the EU-agreed threshold of 3%.
In analysts' opinion, the government will struggle to keep the budget deficit below 3% of GDP in 2017 and 2018, due to new VAT and tax cuts.
Last week, Romania's president Klaus Iohannis signed into law a bill doing away with health and social insurance contributions paid by all pensioners and scrapping income tax on pensions under 2,000 lei ($474/445 euro). At the beginning of January, Iohannis also signed into law a bill eliminating 102 fees and charges, initiated by governing Social Democrat Party (PSD). Also at the beginning of January, the government approved an increase of the minimum wage by 16% to 1,450 lei, to take effect on February 1.
Romania also reduced its VAT rate from 20% to 19% as of January 1. This rate cut follows the 2016 reduction to 20% from 24%.
"Fiscal easing at the peak of the business cycle may weigh on policies beyond 2017: the scope for increasing investment in 2018 and later will remain small unless taxes increase," according to the report.
Shortly after taking office on December 30, Grindeanu said that he expects Romania's 2017 budget to be voted in parliament no later than January 25.
In terms of monetary policy, UniCredit expects BNR to raise its key rate in three steps to 2.5%, starting in November 2017. "The central bank may want to align the policy interest rate to the new inflation level, but the timing of tightening is uncertain. The BNR could choose to look through the initial reflation episode in the first half of 2017 and start raising rates only when inflation approaches the 2.5% target."
At its last monetary policy meeting on January 6, BNR held its key rate unchanged at record low 1.75%. BNR last changed its monetary policy rate in May 2015, cutting it by 25 basis points to 1.75%.
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