OECD Economic Outlook, Volume 2023 Issue 1

Romania

Economic growth will weaken in the near term, reflecting soft demand in the face of continued high inflation, elevated interest rates and subdued growth in trading partners. Recovery, beginning in the second half of this year, will be driven by strengthening household consumption, and foreign demand. The annual increase in output will be 2.6% in 2023 and 3.2% in 2024. The unemployment rate will decline in 2024 but remain above pre-pandemic levels. Consumer price inflation is expected to slow over the next eighteen months but continue to be above target.

Monetary conditions have been significantly tightened and the policy rate should be held at its current level until inflation expectations are durably re-anchored. Fiscal consolidation will be modest in 2024. Longer term, a wider tax base is needed to fund spending on structural reforms, including in health and education while also ensuring fiscal sustainability. Reducing greenhouse gas emissions requires greater renewable energy investment and more energy-efficient buildings. Scope to bring greater numbers of women into employment remains substantial.

Higher interest rates are tempering demand and cooling inflation

Recent indicators point to a further decline in output growth in the near term. The post-COVID‑19 catch‑up has ended, and price inflation and higher interest rates are damping demand. Preliminary information suggests GDP growth slowed in the first quarter to 0.1% (quarter on quarter). Meanwhile, however, an annual increase of 17.6% in the minimum wage came into force in January, bolstering household incomes and boosting aggregate demand and inflation. The consequent pressure on labour costs has likely weighed on employment growth. Headline inflation looks to have peaked; it was 11.4% in April having been over 16% in late 2022.

Romania: Inflation and economic growth indicators

Source: OECD Economic Outlook 113 database.

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Romania: Demand, output and prices

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Government price caps have distanced households and some segments of the business sector from the volatility in wholesale European energy prices, including the falls in prices in recent months. As of May 2023, around 131 000 Ukrainian refugees (equivalent to 0.7% of Romania’s population) have remained in Romania according to United Nations estimates. However, most incoming refugees transit to other countries. These increases in the number of people in Romania have boosted consumption.

Fiscal deficits are set to persist

Separate support packages for households and businesses to temper the impact of high inflation are underway. These are estimated to add about 2% of GDP to fiscal spending over 2023-24, principally in 2023. There is also an energy price cap, which is scheduled to end in March 2025. These supports are prolonging above-trend transfer spending and are the principal reason for no further deficit decline in 2023. Central bank policy rate increases started in October 2021. The rate has been on hold following a rise of 25 basis points to 7% in January. Under the economic conditions described in the projection, the policy rate should be kept at its current level to the end of 2024 to re-anchor inflation expectations and bring price growth back to target. However, it is possible that further rate increases may be required.

Output growth will strengthen in 2024

After weakening in the first half of this year, GDP growth is expected to gradually strengthen over the remainder of the projection period. The economy will expand by 2.6% in 2023 and 3.2% in 2024. The pick‑up in growth will be broad-based, with stronger household consumption, business investment and exports. Inflation is projected to decline due to easing import price growth and lower capacity utilisation. However, the large minimum wage increase will, in the near term, limit the speed of inflation reduction by increasing firms’ labour costs and household spending capacity. Inflation is projected to still be above the upper bound of the central bank’s target (2.5% within a target band of +/- 1 percentage point) by end 2024, at 3.4% in annualised terms. Risks around energy prices and energy security remain sizeable.

More women in the workforce would reduce inequality and bolster potential output

Improving living standards and long-term growth in Romania require further structural improvements on multiple fronts, including tax collection, welfare support, red tape, anti‑corruption measures and infrastructure investment. Success in the latter hinges in part on improving the capacity to absorb EU funds. The gender employment gap is wide; in 2022, the employment rate among women was 17 percentage points lower than that for men, a large disparity when compared with OECD countries. Faster improvement in the availability of affordable childcare would help raise female employment. Romania’s path to reducing greenhouse gas emissions includes a phase-out of remaining coal-based energy and the expansion of nuclear and renewable energy. Scope for energy efficiency gains by raising performance requirements on new buildings and support for retrofits is considerable.