November 5 (SeeNews) - The European Commission said on Thursday it expects Romania's economy to contract by 5.2% this year, improving its July estimate of a 6% decrease of the country's gross domestic product (GDP).
In 2021, Romania's economy is expected to rebound to 3.3% growth, the Commission said in its Autumn 2020 Economic Forecast report, revising downwards its July projection for a GDP rise of 4.0%.
"Romania’s economy is set to recover from a fall in output in the first half of the year due to the COVID-19 crisis. Although the contraction in 2020 appears less severe than initially expected, uncertainty remains very high given the recent evolution of the pandemic and real output is not set to return to pre-crisis levels before the end of 2022," the Commission said.
According to the report, the budget deficit is projected to increase significantly, as the fiscal effort required to fight the crisis comes on top of past fiscal slippages. The general government deficit is forecast to increase to around 10.3% of GDP in 2020, from 4.4% in 2019.
Despite an economic recovery forecast and the expected expiry of pandemic-relief employment support schemes, the deficit is set to rise further to 11.3% in 2021 and to 12.5% in 2022, the Commission warned.
The sharp rise in the forecast budget deficit is due to the full-year effect of the 40% increase in pensions from September 2020, and an additional upward pension recalculation scheduled for September 2021, the Commission said. As a consequence, Romania’s debt-to-GDP ratio is forecast to rise from 35.3% in 2019 to around 63.6 % in 2022.
According to the Commission, prolonged uncertainty related to the future direction of public policies in Romania could reduce confidence and hamper credit flows, negatively affecting investment and growth. On the other hand, the funds allocated to Romania under the Recovery and Resilience Facility are expected to provide further support to investment.
The Commission expects Romania to end both 2020 and 2021 with a 2.5% harmonised index of consumer prices. The unemployment rate is forecast to rise to 5.9% at end-2020 from 3.9% at end-2019.
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