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Nov 09, 2017 15:22 EEST
November 9 (SeeNews) - The European Commission said on Thursday it has raised its projection for Romania’s economic expansion in 2017 to a real 5.7% from 4.3% forecast in May, but warned that the government's policy uncertainties could hamper growth.
The growth of Romania's gross domestic product (GDP) is expected to slow down to 4.4% in 2018, up from 3.7% predicted in May, the Commission said in its Autumn 2017 Economic Forecast published on its website.
"The possible tightening of the central bank’s monetary policy in response to emerging inflation pressures and a widening output gap could dampen the outlook for both private investment and exports. More generally, uncertainty regarding the government’s policies could also hamper growth," the Commission said.
The Commission expects private consumption to decrease in 2018, as inflation increasingly weighs on real disposable income. However, private consumption is expected to continue acting as the main growth driver in 2017 and 2018.
"Real GDP growth accelerated in 2017, driven mainly by private consumption. Looking ahead, growth is set to decelerate but remain above potential."
Growth has accelerated in 2017, with real GDP increasing by 5.8% on the year in the first half, the EC noted. The pick-up in growth has been mostly driven by private consumption, spurred by tax cuts, significant hikes in both public and private wages, and low rates of inflation.
The current account gap is forecast to continue widening from 2.4%/GDP in 2016 to 3.1% in 2017 and 3.2% in 2018, due to strong domestic demand and import growth, which is projected to continue outpacing the growth of exports, in line with strong private consumption.
The general government headline deficit is projected to further deteriorate to 3.5% of GDP in 2017 from 3.0% in 2016, due to numerous fiscal easing measures.
In 2017, the general government deficit is projected to remain at 3% of GDP. Tax cuts, in particular a cut of the standard VAT rate by 1 percentage point have reduced tax revenues. On the expenditure side, public wages and social benefits were considerably increased. On the other hand, public investment was cut significantly in the September’s budget rectification, the Commission said.
As a consequence of the fiscal easing, Romania’s structural deficit is forecast to increase from an estimated 2.2% of GDP in 2016 to around 3.3% in 2017 and 4.3% in 2018.
Regarding inflation, the Commission expects that robust domestic demand, additional wage hikes in a tight labour market and additional fiscal stimulus will gradually drive inflation rate upwards and make it re-enter the Romanian central bank’s target band of 2.5%±1 pp.
The annual average inflation is expected to be 2.9% in 2017 and accelerate further to 3.0% in 2018. Romania's annual inflation rate was -0.5% at the end of 2016.
Details from the Autumn 2017 Economic Forecast on Romania follow:
In 2016, Romania's economy grew by 4.8% year-on-year, compared to a revised growth rate of 3.9% in 2015. Romania's 2017 budget is built on projections for 6.1% economic growth and deficit equivalent to 2.96% of GDP.
On Wednesday, the European Bank for Reconstruction and Development raised its expectations for Romania's economic growth to 5.3% in 2017, but warned that the government may not meet its budget deficit target.
In October, the International Monetary Fund (IMF) said that Romania's real GDP growth is projected to reach 5.5% in 2017 before it decelerates to 4.4% in 2018.
(1 euro=4.6279 lei)
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