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EC lowers Romania 2017 GDP growth fcast, sees budget gap widening

EC lowers Romania 2017 GDP growth fcast, sees budget gap widening EU, Romania (Author: SeeNews). License: all rights reserved.

BUCHAREST (Romania), May 12 (SeeNews) - The European Commission said it has lowered its projection for Romania’s economic expansion in 2017 to a real 4.3% from 4.4% forecast in February due to the fiscal easing measures of the social democratic government.

The growth of Romania's gross domestic product (GDP) is expected to slow down to 3.7% in 2018, the Commission said in its Spring 2016 Economic Forecast published on its website on Thursday, confirming its February prediction.

The Commission expects consumption to remain the main driver of economic growth in Romania during 2017 and 2018.

"Accordingly, growth is expected to remain consumption driven, boosted by tax cuts and increases in public wages and pensions. Investment is forecast to make a modest contribution to growth as the implementation of projects financed from EU funds gradually picks-up," the Commision said.

In 2016, Romania's GDP growth rate rose to an eight-year high of 4.8%, driven mainly by consumption, which was boosted by pro-cyclical fiscal policy and wage hikes, the Commission said.

The current account deficit is forecast to continue widening from 2.4%/GDP in 2016 to 2.8% in 2017 and 2.9% in 2018, due to strong domestic demand and import growth. Export growth is expected to remain moderate, in line with GDP growth in Romania's main trading partners and because of an erosion of competitiveness as wages increase ahead of productivity gains, according to the report.

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.

Romania's 2017 budget contains large increases of public wages and social benefits, including an additional pension increase of 9%, on top of the standard indexation, which is scheduled for July 2017. The deficit is projected to further widen to 3.7% of GDP in 2018, the Commission said

As a consequence of the fiscal easing, Romania’s structural deficit is forecast to increase from an estimated 2.5% of GDP in 2016 to around 3.9% in 2017 and 4.0% 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 (2.5%±1 pp.).

The annual average inflation is expected to turn positive in 2017 at 1.1% and accelerate further to 3.0% in 2018. Romania's annual inflation rate was -0.5% at the end of 2016.

"The main risk to the outlook is the possibility of further fiscal stimulus, which may boost domestic demand in the short-run, but at the expense of the sustainability of public finances," the Commission said.

Unemployment is forecast at 5.4% in 2017, and is expected to slightly decrease to 5.3% in 2018.

Details from the economic forecast on Romania follow:

  2017 2018
Real GDP growth 4.3 3.7
Inflation 1.1 3.0
Unemployment rate 5.4 5.3
Current account balance -2.8 -2.9
Budget balance -3.9 -4.0

Earlier in May, the European Bank for Reconstruction and Development (EBRD) increased its forecast for Romania's economic growth to 4% in 2017 but warned that the government may miss its budget deficit target.

In April, the International Monetary Fund (IMF) said that Romania's real GDP growth is projected to reach 4.2% in 2017 before it decelerates to 3.4% in 2018.