23.

ROMANIA
Domestic demand fuels robust growth, fiscal consolidation reversed
Economic growth in Romania is forecast to remain robust in 2015 and 2016, driven by strong private
consumption and recovering investment. Inflation is expected to fall significantly in 2015 and remain
low over the forecast horizon. The fiscal consolidation path is projected to be reversed in 2016.
Above-potential and accelerating growth

Romania's economy grew by 2.8% in 2014. The

main engine was private consumption with
marginal contributions from net exports and
inventories. GDP growth is forecast to remain
robust and above potential at 2.8% in 2015, mainly
driven by private consumption and investment.
Accelerating domestic demand, again boosted by
cuts in indirect taxation, as well as a benign
external environment, are expected to lift real GDP
growth to 3.3% in 2016.
Consumer sentiment is at a post-crisis high and
expected wage increases accompanied by a lower
VAT rate for food as of June 2015, a more
favourable labour market outlook and low inflation
are set to raise household real disposable income.
After two years in negative territory, investment
ended 2014 on a positive note (+1.4% y-o-y in the
last quarter of 2014). Private investment is likely
to continue growing over the forecast horizon
supported by lower borrowing costs, a tax
exemption on reinvested profits, robust economic
growth prospects, and economic sentiment levels
which are at a seven-year-high. Public investment
is expected to grow in 2015 with EU funds
absorption picking up, before decreasing in 2016.
Graph II.23.1: Romania - Real GDP growth and contributions
10

pps.

8
forecast

6
4
2
0
-2
-4
-6

in 2016. Exports are expected to keep growing in

2015 and 2016, but at a slower pace, while
increasing domestic demand stimulates even
stronger imports. The current-account deficit
improved to 0.5% of GDP in 2014. It is forecast to
increase in 2015-2016, reflecting the deterioration
in the trade balance driven by higher imports.
Record low inflation

Inflation declined significantly in 2014 with HICP

falling to an average of 1.4%, mostly due to the
VAT cut for bread, falling global oil prices and a
good harvest in 2014. Annual average inflation is
forecast to decelerate further to a record low of
0.2% in 2015 owing to the VAT reduction for
food, low energy prices and the persistence of low
inflation in the EU. Surging domestic demand is
expected to exert upside pressure on inflation in
2016, but the 4 pps. across-the-board cut in VAT
will work in the opposite direction, resulting in an
annual average inflation of 0.9%.
Labour market with signs of improvement

Employment in Romania grew by 1% in 2014, this

being the first yearly increase since the outbreak of
the crisis. It is projected to continue growing in
2015 and 2016. The unemployment rate dropped to
6.8% in 2014 and is expected to decrease further to
6.4% by the end of the forecast period. Pushed by
wage increases, compensation per head is expected
to grow steadily in 2015 and 2016, despite the cut
in social security contributions enacted in October
2014; against the background of low inflation, this
will result in higher real wages. As productivity
growth picks up again in 2016, unit labour costs
increase but only moderately over the forecast
horizon.

-8
-10
07

08

09
10
HH consumpt.
Net exports
GFCF

11

12

13
14
15
Gov. consumpt.
Inventories
Real GDP (y-o-y%)

16

The growth contribution of net exports faded out to

almost zero in 2014 as import growth picked up. It
is forecast to turn negative in 2015 and remain so

110

Balanced risks to the growth outlook

Downside risks stem mainly from households

constraining consumption more than expected to
reduce their indebtedness and from a possible
escalation of the Russia-Ukraine crisis. Upside
risks are related to a better-than-expected
implementation of the EU investment plan.

Member States, Romania

Tax cuts to question fiscal consolidation

The 2014 deficit came out at 1.5% of GDP.

Revenue was higher than in 2013, as a hike in fuel
excise rates and the introduction of a special
constructions tax outweighed the 5 pps. cut in
social security contributions introduced in late
2014. Expenditure grew slower than GDP among a
dent in public investment.
The government budget deficit is forecast to widen
slightly to 1.6% of GDP in 2015, as a reduction in
the tax revenue-to-GDP ratio more than offsets the
reduction in the expenditure ratio. The revenue
projection includes the full-year impact of the cut
in social security contributions, the reduction in the
special construction tax rate and the reduction of
VAT rates for foodstuff and related services to be
implemented starting June 2015. Savings occur as
expenditure on goods and services and subsidies
are expected to fall as a share of GDP. The public
wage bill remains contained because of a partial
wage freeze. This forecast assumes full use of the
budget allocation for national EU funds
co-financing, but under-execution of domestically
financed capital expenditure given the low record
in the first quarter.

For 2016, the headline deficit is expected to

sharply deteriorate to 3.5% of GDP. This forecast
incorporates the new draft fiscal code that was
adopted by the government on 18 March but is
awaiting parliamentary approval. The fiscal code
includes an array of tax cuts, such as a reduction in
VAT rates by 4 pps. in 2016, reduced excise rates,
the abolition of dividend taxation and removal of
the special constructions tax. The expiration of the
current natural resource taxation regime and a
further diversion of social security contributions
towards the second pension pillar are taken into
consideration. The expenditure side includes a
reduction in capital expenditure, linked to the
transition between programming periods for EU
structural funds. Risks to the budget outlook are on
the upside as the size of the envisaged tax cuts
might be reduced. An amendment to alleviate cuts
in excise rates and dividend taxation, as reportedly
proposed by the senate budget committee, would
bring the deficit close to 3% of GDP.
In structural terms, the deficit is forecast to remain
stable at around 1% of GDP in 2014-15 and to
worsen to 3% of GDP in 2016. Government debt
is set to increase from 39.8% of GDP in 2014 to
42.4% of GDP by 2016.

Table II.23.1:
Main features of country forecast - ROMANIA
2013
GDP
Private Consumption
Public Consumption
Gross fixed capital formation
of which: equipment
Exports (goods and services)
Imports (goods and services)
GNI (GDP deflator)
Contribution to GDP growth:

Annual percentage change

bn RON Curr. prices

% GDP

95-10

2011

2012

2013

2014

2015

2016

637.6

100.0

3.0

1.1

0.6

3.4

2.8

2.8

3.3

395.0

62.0

5.6

0.8

1.2

1.2

4.5

3.5

3.8

90.5

14.2

0.2

0.6

0.4

-4.8

5.3

0.7

2.5

151.6

23.8

5.9

2.9

0.1

-7.9

-3.5

3.2

4.2

52.1

8.2

5.1

19.6

-2.7

-7.2

-4.1

4.0

4.9

253.4

39.7

9.3

11.9

1.0

16.2

8.1

6.0

5.9

257.6

40.4

12.8

10.2

-1.8

4.2

7.7

6.5

6.8

621.9

97.5

3.0

1.0

0.2

2.7

2.8

2.8

3.3

5.8

1.4

0.9

-2.1

2.6

3.0

3.7

-0.4

-0.2

-1.4

1.2

0.1

0.0

0.0

-2.2

-0.1

1.1

4.3

0.1

-0.2

-0.4

-1.8

-0.8

-4.8

-0.6

1.0

1.2

1.4

6.9

7.2

6.8

7.1

6.8

6.6

6.4

34.5

-4.1

9.4

2.7

2.0

2.5

2.8

28.2

-5.8

3.5

-1.3

0.3

0.9

1.0

-1.0

-10.1

-1.4

-4.5

-1.5

-0.4

-0.7

Domestic demand
Inventories
Net exports

Employment
Unemployment rate (a)
Compensation of employees / head
Unit labour costs whole economy
Real unit labour cost
Saving rate of households (b)
GDP deflator
Harmonised index of consumer prices
Terms of trade goods
Trade balance (goods) (c)
Current-account balance (c)
Net lending (+) or borrowing (-) vis-a-vis ROW (c)
General government balance (c)
Cyclically-adjusted budget balance (d)
Structural budget balance (d)
General government gross debt (c)

-2.9

-7.0

-6.7

-9.2

-11.4

-10.3

-10.6

29.5

4.7

4.9

3.4

1.8

1.3

1.7

5.8

3.4

3.2

1.4

0.2

0.9

2.4

1.8

-3.4

-1.1

0.8

0.0

0.5

-7.9

-6.7

-5.8

-3.9

-3.8

-4.2

-4.4

-6.6

-4.7

-4.7

-1.2

-0.5

-0.8

-1.0

-6.1

-4.2

-3.3

1.1

1.9

1.6

1.4

-3.6

-5.3

-2.9

-2.2

-1.5

-1.6

-3.5

-4.0

-4.4

-1.6

-1.5 -

-1.0

-1.3

-3.4

-3.3

-2.1

-1.5 -

-1.0

-1.3

-3.4

18.1

34.2

37.3

38.0

39.8

40.1

42.4

(a) as % of total labour force. (b) gross saving divided by gross disposable income. (c) as a % of GDP. (d) as a % of potential GDP.

111