OECD Economic Outlook, Volume 2022 Issue 2

Romania

Output growth of 6.5% is projected for 2022, largely reflecting a strong recovery from the economic impact of COVID-19 early in the year. Quarterly growth in the second half of 2022 is being damped by the effects of high inflation on consumption and reduced foreign demand on exports. Output growth will gradually strengthen as these effects diminish. Increased inflows of EU funds will provide additional impetus to investment. Real GDP growth is projected at 1.4% in 2023 and 2.8% in 2024. Uncertainty about commodity prices and energy supply relating to Russia’s war of aggression against Ukraine is a key risk.

With headline consumer price inflation expected to be 13.3% in 2022, tighter monetary policy should continue to re-anchor inflation expectations and bring inflation back towards target. Fiscal consolidation should continue in 2023 and 2024. The government should target cost-of-living support to low-income households. An expansion of the tax base is needed in the medium term. Greening the energy mix and achieving more efficient energy use, notably in housing, needs to be a priority.

Rising interest rates and a bad harvest are weighing on economic activity

Solid GDP growth in the first half of 2022, driven by household consumption and exports, was reflected in falling unemployment. The unemployment rate declined further over summer, to 5.2% in September. Output growth is showing signs of slowing. Industrial production decreased by 1% in August (year-on-year) and the grain harvest is estimated to be 25% lower than in 2021 due to drought. Headline inflation reached 15.3% in October (year-on-year). In recent months, food price inflation has continued to rise while increases in other components of the consumer price index have decelerated.

Romania

Source: OECD Economic Outlook 112 database.

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Romania: Demand, output and prices

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Romania’s direct trade and financial links to Russia and Ukraine are small. In 2020, Ukraine was the destination of 1% of goods exports and for Russia the share was 1.6%. Around 70% of Romania’s energy comes from domestic production and around one quarter of energy consumed is from renewable sources. Also, Romanian natural gas production in the Black Sea is coming on stream. However, the country’s integration into European oil and gas markets means it shares with other European countries the high level of uncertainty about the future supply and price of energy. Around 1.3 million border crossings directly from Ukraine into Romania had been recorded as of September 2022 with additional inflows via Moldova. Most incoming refugees transit to other countries; around 80 000 (equivalent to 0.4% of Romania’s population) have remained in Romania according to United Nations estimates.

The monetary stance has tightened

In response to inflationary pressures the central bank has increased its policy rate since late last year from 1.5% to 6.75% in November. It is expected the rate will now remain unchanged until late in 2024. Fiscal spending is being pushed up by measures to shield consumers’ spending power, including a cap on electricity and gas prices that is in place until August 2023. Outlays on the measures amount to around 1.5% of GDP. Nevertheless, the fiscal deficit is projected to narrow. For 2022, strong growth in economic activity in the first half of the year and termination of COVID‑19 support outweigh energy-bill support. Further deficit reduction is expected in 2023 and 2024, reflecting reduced spending on support and recovery in economic activity. Implementation of the Next Generation EU Plan is expected to see around one-third of available funds accessed by the end of 2024.

Growth will slow and then pick up gradually

Growth will weaken from 6.5% in 2022 to 1.4% in 2023, reflecting weaker household consumption and external demand. Inflation is projected to decline due to easing oil and food prices along with rising unemployment. Inflation is projected to reach the upper bound of the central bank’s target (2.5% within a target band of +/-1 percentage point) in 2024. Policy rate cuts are expected to commence in late 2024. Uncertainty around future commodity prices and energy supply are key risks. The continued wide trade deficit, though largely funded by foreign direct investment and EU funds, remains a concern. A faster uptake of EU funds would bolster activity.

Tax reform could improve public finances and reduce inequality

Macroeconomic policy needs to remain responsive to changing conditions in steering a course towards lower inflation while avoiding a substantial economic downturn. For the medium term, expanding the tax base, notably by removing special tax regimes and exemptions, would improve public-finance sustainability and make the tax system more equitable. Improving living standards and reducing disparities, including those across regions, requires improvements in coverage and adequacy of social assistance, further efforts to tackle corruption and more infrastructure investment. The latter would be helped by increasing the capacity to absorb EU funds. Better take up of EU funds would also help the green transition, including through accelerating building refurbishment and investment in renewable energy.