EBRD raises Romania's 2017 GDP growth fcast, sees risk of high budget deficit

In its previous report released in May, the EBRD projected that Romania's gross domestic product (GDP) will grow by 4% in 2017.

"Consumption will continue to drive growth in 2017 and 2018, supported by a further increase in minimum and public sector wages, which formed part of the governing PSD’s [Social Democrat Party] election promise. The latter will mean that government spending is likely to remain elevated, with a risk that the 3% of GDP deficit limit under the fiscal compact will be breached in 2017," the EBRD said in its latest Regional Economic Prospects report.

According to the Maastricht treaty signed in 1992, the ratio of the annual general government deficit relative to GDP at market prices must not exceed 3% at the end of the preceding fiscal year.

"While overall investment has been weak, public investment will be boosted by the increased absorption of EU funds. Meanwhile, better economic prospects of Romania’s trading partners mean that exports will offset part of the growing import bill resulting from higher domestic consumption. GDP growth of around 5.3% is expected in 2017, moderating to 4.2% in 2018," the EBRD added.

Romania's 2017 budget is built on projections for 6.1% economic growth and deficit equivalent to 2.96% of GDP.

In 2016, Romania's economy expanded by 4.8% compared to a revised growth rate of 3.9% in 2015, supported by strong domestic demand. The country's consolidated budget showed a deficit equivalent to 2.41% of the projected GDP last year, compared to 1.47% of GDP in 2015, according to finance ministry data.

In 2017, the average growth rate in Southeast Europe and Turkey is expected to rise slightly to 3.6%, from 2.9% in 2016, reflecting a pick-up in investment and stronger wage growth, the EBRD said. In 2018, the bank expects economic growth in the region to decelerate to 3.3%.

Growth is then expected to moderate somewhat in 2018 as fiscal stimulus wears off in Turkey, the one-off impact of higher social payments in Poland fades away and shortages of skilled labour constrain medium-term growth potential in Central Europe, the EBRD added.

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