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Spring 2018 Economic Forecast, EU, Romania: Growth set to slow down but remain robust

>>> The largest GDP growth in the EU will be recorded by the Eastern bloc states: Slovenia: 4.7%, Romania: 4.5%, Poland: 4.3%, Hungary: 4.0%, Slovakia: 4.0%
By Edwig Ban
The team of Pierre Moscovici, the Commissioner for Economic and Financial Affairs, made public the EC estimates of economic growth in the EU Member States for the years 2018 and 2019. They are bureaucratic and ephemeral considerations that do not last for more than 6 months. But they are an indication of the near future of the EU economy.
Here are some considerations about Romania:
Romania’s economic boom intensified in 2017, with real GDP increasing by 6.9%, a post-crisis high. The main driver of growth continued to be private consumption, which expanded by around 10% in real terms. The private consumption boom was spurred by expansionary fiscal policy measures including cuts to indirect taxes and public sector pay rises. After contracting in 2016, investment returned to growth in 2017 on the back of rising private investment in both machinery and equipment and residential construction. Public investment, however, fell sharply for the second consecutive year. The growth in private consumption also boosted imports. As a consequence, net exports have worked as a drag on real GDP growth, despite continued export market share gains.
Looking ahead, growth is expected to decelerate but remain robust. Private consumption is forecast to slow down in 2018, as nominal wage growth moderates and inflation increasingly weighs on real disposable income, but will remain the main driver of growth. Investment, however, is likely to further strengthen in 2018 on the back of a pick-up in the implementation of projects financed by EU funds. Overall, real GDP growth is expected to be 4.5% in 2018 and 3.9% in 2019. The output gap is estimated to have turned positive in 2017 and is forecast to remain relatively stable over the forecast horizon.
Imports are projected to continue rising faster than exports in 2018 and 2019. Accordingly, net exports will remain a drag on real GDP growth. The current account deficit has been widening progressively since 2014, when it was close to zero, mainly on account of a weakening trade balance. The current account deficit widened to 3.5% of GDP in 2017 and is forecast to be 3.6% of GDP in 2018 and 3.9% in 2019.
In 2018, the general government deficit is projected to increase to 3.4% of GDP. The unified wage law, enacted in summer 2017, increased gross public wages by 25% in January 2018 and contains additional increases for doctors and teachers. The fiscal cost of this is set to be partially compensated by a shift of social security contributions from 22.75% for employers and 16.5% for employees to 2.25% and 35% respectively. Moreover, the flat personal income tax (PIT) rate was cut from 16% to 10%. The deficit is projected to reach 3.8% of GDP in 2019, driven by increases in social transfers and public investment.

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