December 13 (SeeNews) - Romania's economy is expected to grow by a real 7.1% in 2017 driven by household consumption, before economic expansion slows down to 4.1% in 2018, Erste Group analysts said on Wednesday.
In its previous forecast made in September, Erste said Romania's economy would grow by a real 5.5% in 2017. For 2018, the bank kept the same forecast as in September, of 4.1%.
"Real GDP growth exceeded even the most optimistic forecasts in the third quarter due to the outstanding performance of agriculture, and Romania is on its way towards economic growth of around 7% in FY17," the analysts said in their latest macroeconomic outlook on Romania.
Looking at 2018, analysts said they expect a slowdown of economic growth as household consumption will lose speed, pressured by rising consumer prices.
"Consumer confidence deteriorated in October and November, probably due to the rapidly changing fiscal environment. While the government's plans are ambitious, the recovery of public investments is surrounded by uncertainties due to the very limited fiscal space," the Erste analysts pointed out.
On December 7, Romania's government approved the 2018 draft budget based on projections for 5.5% economic growth and deficit equivalent to 2.96% of GDP under the European System of Accounts (ESA) standards. The budget is expected to be debated and voted on in parliament soon, but no exact date has been set yet. It should then be endorsed by president Klaus Iohannis.
"Keeping the budget deficit at 3% of GDP in 2018 in the context of fresh pay hikes in the public sector would automatically bring an additional fiscal burden for private companies, hampering growth," the Erste analysts said.
Erste expects Romania's budget deficit to reach 3.0% of GDP in 2017 and 3.4% in 2018.
Romania's annual economic growth accelerated to 8.8% in the third quarter of 2017 from 6.1% in the previous quarter on the back of strong performance of the agricultural and industrial sectors and on rising consumption, latest official data released by the country's statistical board, INS, showed. In 2016, Romania's economy expanded by 4.8% year-on-year compared to a revised growth rate of 3.9% in 2015.
On the monetary policy front, Erste foresees four hikes in the key rate next year, with the first one in the first quarter of 2018.
BNR's monetary policy rate has stayed at 1.75% since May 2015, following a cut from 2.0%.
Romania's annual consumer price inflation accelerated to 3.2% in November, from 2.6% in October.
Erste forecasts end-2017 inflation of 1.3% in Romania, while for end-2018 it expects a 4% rise in consumer prices.
The bank continues to favoкr the scenario of a slight depreciation of the leu in the coming quarters, due to risks related to the widening of the current account balance and budget deficits. The analysts see the leu/euro pair at 4.57 at the end of 2017.
"We think that local developments would not significantly increase leu volatility and see the external environment as the potential trigger for any significant directional move in the FX rate," the Erste analysts said.
The analysts also think that the situation seen at the beginning of 2017, when excess liquidity persisted in the market for several months, will not repeat itself in early-2018, since it would add depreciation pressure on the leu and weaken the message of strict liquidity management sent by the central bank foresee a minor increase in bond yields in 2018.
"As a result, upward pressure on bond yields should persist in 2018, although a temporary increase in liquidity could relieve the pressure for a short period of time at the end of December or in early January," the analysts said.
The bank has revised its end-year average ten-year yield forecast to 4% in 2017 from a previous 3.9%.
In Romania, Austria's Erste Group owns Banca Comerciala Romana (BCR), which is the country's top bank by assets.
(1 euro = 4.6327 lei)