OECD Economic Outlook, Volume 2023 Issue 2

Romania

Real GDP growth will decline to 1.9% in 2023, remain below potential at 3% in 2024, and pick up to 3.3% in 2025. High borrowing costs and slower income growth will weigh on private spending. Reduced job creation will see unemployment remain above pre-pandemic rates. Major infrastructure spending will support activity while exports recover due to better international conditions. With spare capacity in the economy, inflation will fall to 3.5% by the end of 2025, the top of the target band. Sustained cost pressure could, however, cause core inflation to stay higher for longer.

Monetary policy must remain tight in 2024 to cool demand and tame high inflation. Higher taxes and spending restraint will reduce the fiscal deficit. However, revenue shortfalls will remain large, requiring comprehensive tax reform to stabilise public debt. To improve the business environment, efforts to strengthen institutions must be matched by policy stability. Carbon pricing can complement building retrofits to reduce emissions while limiting distortions to activity.

Private demand is cooling, inflation remains high

Economic conditions have weakened. Preliminary estimates suggest growth in real GDP slowed to 0.4% in the third quarter of 2023, down from 1.3% in the second quarter. Manufacturing and farm production are subdued, but infrastructure construction is supporting activity. Consumer spending is flagging. Housing market activity remains soft while retail trade volumes decreased in the year to September. Reduced credit growth is consistent with weakening private investment intentions. Hiring has also slowed. Unemployment is above pre-pandemic levels, at 5.4% in September, but wage pressures are elevated. Lower energy prices helped reduce headline inflation to 8.1% in October, but rising services prices have lifted core inflation.

Romania: Investment and inflation indicators

Source: OECD Economic Outlook 114 database; and Eurostat.

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Romania: Demand, output and prices

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Trade has slowed with subdued conditions in European markets. Export values declined in the past year, but imports fell further on lower oil and gas prices. The current account deficit has decreased but remains wide. Banking indicators appear healthy. Lower foreign interest rates and exchange rate stability have encouraged firms to take on more euro-denominated debt in 2023, a development the authorities are monitoring. Romania remains exposed to heightened geopolitical tension in the region.

Fiscal consolidation is expected to continue

The National Bank of Romania has kept its policy interest rate at 7% since January. With price pressures still strong, monetary policy must remain tight in 2024. Extra capacity in the economy will permit policy easing from mid-2025. The projections assume a 75 basis-point reduction in the policy rate by the end of 2025. Fiscal consolidation has so far undershot government targets, but fiscal policy will tighten in 2024 and 2025. Lower energy prices are expected to reduce outlays on price capping schemes in place until 2025. But increased defence commitments and pension reforms may complicate efforts to contain spending. Higher taxes, and limits on the public payroll, will pull the budget deficit to 5.4% in 2024, helping to cool demand. However, revenue shortfalls will remain wide, increasing the public debt at a time of high borrowing costs.

Slower growth will ease capacity constraints

GDP growth will strengthen from 1.9% in 2023 to 3% in 2024. Stock drawdowns have weighed on growth this year, but are not expected to be repeated next year. High borrowing costs and increased taxes will keep private demand subdued in 2024. Slow production will reduce hiring. Wage growth will diminish with unemployment at rates above those seen before the pandemic. In 2025, economic growth will pick up to 3.3%. EU-funded infrastructure projects will continue to generate economic activity as trade recovers with stronger foreign demand. Price growth will moderate as domestic capacity constraints ease. By the end of 2025, headline inflation will slow to 3.5%, the top of the target band. Risks to the outlook are elevated. High inflation could prove hard to tame, requiring larger macroeconomic policy corrections. An economic downturn could result in higher unemployment. There are also upside risks. A stronger translation of EU funds to investment could boost GDP growth and lift future productive capacity.

Tax reform is needed for sustainable, inclusive growth

Commitments to improve health, education and social protection will strain limited government resources. OECD long-term projections suggest ageing-related costs could increase by over 6 percentage points of GDP by 2050. Tax reform is needed to fund future outlays while keeping public debt manageable (52% of GDP in 2022). Removing distortions would limit the growth impact of a larger tax burden. The first priority is to end sectoral income tax exemptions and shift more small firms from distortive turnover-based taxes onto the corporate income tax regime. Romania should also transition to progressive labour income taxation. Reduced tax burdens on those with small salaries would encourage formal employment by low‑skilled workers. Tax reform could also complement broader efforts to boost female participation, including planned pension age increases and investment in subsidised childcare. Sustaining rapid productivity growth will depend on stronger institutions and predictable policymaking. Romania’s climate strategy aims to reduce energy consumption by upgrading the building stock. Greater use of market-based measures, including carbon pricing, could reduce the economic cost of mitigating greenhouse gas emissions.