OECD Economic Outlook, Volume 2024 Issue 1

Romania

Real GDP is projected to grow by 2.8% in 2024 and 3.1% in 2025, below potential. Slow job creation will keep the unemployment rate above pre-COVID levels. Higher real incomes will boost private consumption. Export volumes are expected to recover on improving conditions in Europe. Ongoing infrastructure projects will support activity but growth contributions from investment should moderate. With demand increasing more gradually than the economy’s supply capacity, inflation is expected to return to the target band by the end of 2025. Persistent labour cost pressure could, however, cause inflation to remain higher for longer.

The central bank will need to leave interest rates high until early 2025 to keep demand at sustainable levels. Faster fiscal consolidation would support restrictive monetary policy. Tax revenues must rise to fund new spending priorities while stabilising the public debt burden. Continued governance reforms would encourage business investment. To keep Romania’s climate goals in sight, electricity grid upgrades are needed to accommodate more renewable energy generation.

Inflation is easing amid moderate growth

Output increased more than expected in 2023 (up 3% in the year to the fourth quarter). Recovering agricultural production and high levels of construction supported activity. In contrast, structural weakness persisted in manufacturing and growth in consumer services was also weak. A bounce in retail trade volumes in early 2024 may signal a developing recovery in household consumption. However, housing market activity remains subdued. Interest rates on new loans to businesses have stabilised at levels significantly higher than a few years ago, with limited real growth in loans to firms in 2023. Earlier declines in job vacancies have translated to weak employment growth in recent months. The unemployment rate is little changed from levels late last year (5.6% in February), while wage growth remains high, in part reflecting large increases in minimum wages and public sector pay. Value added tax increases in early 2024 contributed to broader price pressures, which are particularly pronounced in services. Headline consumer price inflation was 6.6% in March, well below recent peaks but still above target. Excluding food, energy and regulated prices, consumer prices were 7.1% higher than a year earlier.

Romania: Inflation and fiscal indicators

Source: Eurostat; and OECD Economic Outlook 115 database.

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Romania: Demand, output and prices

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Regional tensions amid Russia’s ongoing war of aggression against Ukraine add uncertainty to the outlook. Recent slow growth in Romania’s export values reflects subdued conditions in Europe. A recovery in imports has also contributed to the expansion of the country’s wide current account deficit. In March, Romania joined the Schengen Area with the lifting of air and sea border controls with other members. An expected boost to trade and travel should increase with future elimination of land border controls. Government caps on energy prices and food product markups continue to mitigate price volatility.

Fiscal policy is slowly tightening

The National Bank of Romania’s policy interest rate remains at 7%, unchanged since January 2023. Strong growth in wages and services prices shows that tight monetary policy remains important and should continue through 2024. Gradual policy easing should be possible from mid-2025 provided inflation is nearing the target band. The projections assume a cumulative 75 basis-point reduction in the policy rate by the end of 2025. Curbs on government consumption and tax increases should contribute to modest fiscal tightening over the projection period. The budget deficit is projected to narrow to 6.2% of GDP and remain near that level in 2025 as costs associated with pension reforms increase. Public debt and interest payments will continue to grow more rapidly than GDP.

Below-trend output growth is set to continue

Real GDP is projected to grow by 2.8% in 2024 and 3.1% in 2025. Below-trend output growth will limit employment increases, keeping the jobless rate near recent levels. Real income boosts from reduced cost pressures and higher pensions will support private consumption. Exports are expected to strengthen as growth in Europe recovers. Construction activity will remain solid, yet growth contributions from investment will decline as major projects near completion. With demand growing more slowly than the economy’s productive capacity, inflation is expected to fall within the target band by late 2025. However, if wage pressures persist, or fiscal consolidation disappoints, inflation could remain higher for longer.

Tax reform and sound governance would help sustain income convergence

Higher revenues are needed to fund government spending and limit public debt accumulation. The immediate priorities are to strengthen tax enforcement, close personal income tax loopholes, and further restrict eligibility to the microenterprise tax regime. As inflation moderates, reforms to broaden the value added tax base should continue. Sustaining rapid growth in productivity will require strong competition and a stable policy environment. Newly tightened governance rules for state-owned enterprises must be fully implemented. Recourse to emergency ordinances should be further limited, with policy design supported by impact assessment and consultation with stakeholders. Lifting workforce participation will require policies to encourage more women to work, including better childcare access. Shifting away from fossil fuels will require faster deployment of renewables, supported by power grid upgrades.