23.

ROMANIA
Strengthening domestic demand contributes to robust growth

90
Stable outlook for growth and exports
Romanias economy beat expectations by growing
as much as 3.5% in 2013. Economic growth was
driven by a robust industrial output and an
abundant harvest feeding strong exports. Growth is
set to slow, but to remain robust at 2.5% in 2014
and 2.6% in 2015. It is projected to remain above
potential over the forecast horizon thanks to
improved confidence and more supportive
international conditions, thereby further reducing
the still negative output gap. Structural reforms,
such as the liberalisation of energy markets and the
new labour code, are starting to bear fruit.
Domestic demand is expected to gradually
overtake net exports as the main driver of growth.
Investment is projected to regain momentum this
year, supported by better absorption of EU funds
as major infrastructure projects move ahead.
Private consumption is expected to pick up
moderately as consumer confidence improves and
disposable income increases on account of higher
real wages. At the same time, credit growth, which
was in negative territory in 2013, is expected to
remain constrained by the ongoing deleveraging of
households and banks.
-3
-2
-1
0
1
2
3
4
-8
-6
-4
-2
0
2
4
6
8
10
05 06 07 08 09 10 11 12 13 14 15
pps.
Graph II.23.1: Romania- Real GDP growth, HICP
inflation and employment growth
Real GDP (y-o-y%) HICP
Employment growth (rhs)
forecast
y-o-y%

In 2013, the balance of trade in goods and services
improved strongly by 4.1% of GDP as export
growth was strong and import growth remained
subdued. The contribution of net exports to growth
is forecast to fade out in 2014 and to turn negative
in 2015. Exports are expected to keep growing on
the back of an improvement in the external
environment, particularly in the EU. However,
imports are set to rise over the forecast horizon,
alongside domestic demand, outpacing export
growth in 2015. Nonetheless, exports are expected
to keep growing on the back of an improvement in
the external environment, particularly in the EU.
Inflation to bottom out in H1 2014
Inflation declined significantly in the second half
of 2013. This was mainly because of a drop in
food prices thanks to a good harvest, a cut in VAT
on flour and bakery products, and because of a
favourable base effect from high food prices in
2012. Annual average inflation is forecast to
decelerate further to 2.5% in 2014 amid historical
lows in the first half of the year, again thanks to
falling food prices. It is set to return to the upper
part of the central bank's target band (2.5%1 pp.)
in the second half of 2014 as the favourable base
effect fades and the increase in the fuel excise rate
introduced on 1 April kicks in. As domestic
demand recovers, inflation is expected to pick up
to an average of 3.3% in 2015. The rate of energy
price inflation remains above headline inflation
over 2014-15.
Broadly balanced macroeconomic risks
Downside risks to growth include the effects of
faster deleveraging by households and by financial
institutions, and a potentially negative base effect
from 2013s record harvest and strong industrial
performance. Upside risks would include higher
investment induced by better-than-expected
absorption of EU funds. Risks to the inflation
outlook are balanced over the forecast horizon.
Despite robust growth, recovery of the labour
market remains weak
In 2013, despite robust economic growth, the
unemployment rate increased somewhat, to 7.3%,
Growth is expected to gradually rebalance towards domestic demand over the forecast period, after
very strong export growth in 2013. Real GDP growth is set to remain robust in 2014 and 2015. Annual
average inflation is projected to moderate in 2014, reaching historical lows in the first half of 2014. The
fiscal adjustment is forecast to continue, albeit at a slower pace.
Member States, Romania


91
while total employment went down, largely on the
back of a decreased number of self-employed. In
both 2014 and 2015, policy measures, especially
those targeted at youth unemployment, should start
paying off. Thus, despite a continuous decline in
the working age population, the labour force is
expected to start growing again on the back of a
slowly increasing employment and slightly
decreasing unemployment rate. Compensation per
employee is assumed to grow moderately in both
forecast years, despite the significant increase in
the minimum wage this year. Contrary to 2013,
private sector wages are likely to grow faster than
public sector wages by 2015.
Fiscal adjustment to slow
The general government deficit in Romania was
reduced from 3% in 2012 to 2.3% of GDP in 2013.
The consolidation was expenditure-driven, with
total expenditures relative to GDP being down by
1.7 pps. and total revenues being lower by 1 pp. in
2013.
The budget deficit is forecast at 2.2% of GDP in
2014. On the expenditure side, the projection takes
account of the indexation of pensions foreseen by
law, a limited and targeted increase in public
sector salaries, and more resources for co-
financing EU funds. On the revenue side, the
forecast takes into account the inflation indexation
of excise duties, the excise-rate hike for energy
products, the broadening of the basis for property
tax, and the additional social security contributions
thanks to a two-step rise in the minimum wage
from 800 to 900 RON.
In 2015, based on the customary no-policy-change
assumption, the deficit is projected to decrease
further to 1.9% of GDP, as revenues improve
moderately, in line with the gradual switch towards
stronger domestic demand as the main driver of
growth. The structural budget balance should
improve mildly over the forecast horizon by about
0.1% of GDP. Government debt is expected to
increase from 38.4% in 2013 to around 40% in
2014 and to stabilise at that level in 2015.
The main risks to the budgetary projections over
the forecast horizon are tilted to the downside and
mainly relate to expenditure control around
elections and tax collection.


bn RON Curr. prices % GDP 94-09 2010 2011 2012 2013 2014 2015
586.7 100.0 3.2 -1.1 2.3 0.6 3.5 2.5 2.6
372.9 63.6 5.7 -0.3 1.4 1.5 1.3 2.0 3.0
89.0 15.2 0.8 -4.7 -0.2 1.2 -1.8 1.8 1.6
154.3 26.3 7.0 -1.8 7.7 3.8 -3.3 2.7 4.3
59.8 10.2 7.8 -19.1 23.6 4.1 -3.8 2.5 4.5
238.5 40.6 10.2 13.2 11.6 -1.5 13.5 6.5 5.6
266.1 45.4 12.3 11.1 10.5 -0.2 2.4 5.9 6.8
576.2 98.2 3.2 -1.0 2.2 0.1 2.8 2.5 2.7
6.1 -1.5 2.7 2.1 -0.3 2.2 3.1
-0.9 0.4 -0.2 -1.1 -0.6 0.0 0.0
-1.9 0.0 -0.2 -0.5 4.4 0.3 -0.5
-2.1 -0.3 -0.8 1.3 -0.3 0.4 0.7
6.4 7.3 7.4 7.0 7.3 7.2 7.1
43.3 -3.3 -4.1 4.2 5.9 5.4 4.5
35.9 -2.4 -7.0 5.0 2.0 3.3 2.5
-0.3 -7.7 -10.6 0.3 -1.4 0.5 -0.3
- -3.8 -7.0 -8.5 -9.8 -9.7 -11.3
36.3 5.7 4.0 4.7 3.5 2.8 2.8
- 6.1 5.8 3.4 3.2 2.5 3.3
2.1 1.0 2.0 3.1 -1.1 -0.8 0.0
-7.5 -6.1 -5.6 -5.6 -2.4 -2.5 -3.0
- -4.4 -4.5 -4.4 -1.1 -1.2 -1.6
-5.8 -4.2 -3.9 -3.0 1.2 0.9 0.4
- -6.8 -5.5 -3.0 -2.3 -2.2 -1.9
- -6.0 -5.0 -1.9 - -1.7 -1.8 -1.7
- -6.1 -3.8 -2.5 - -1.7 -1.8 -1.7
- 30.5 34.7 38.0 38.4 39.9 40.1
GNI (GDP deflator)
Structural budget balance (c)
Saving rate of households (b)
Main features of country forecast - ROMANIA
Unemployment rate (a)
Gross fixed capital formation
Current-account balance (c)
Contribution to GDP growth:
General government gross debt (c)
GDP deflator
Compensation of employees / head
of which: equipment
Domestic demand
Harmonised index of consumer prices
Table II.23.1:
Net exports
Public Consumption
Trade balance (c)
Employment
Annual percentage change 2012
GDP
Private Consumption
Exports (goods and services)
Net lending (+) or borrowing (-) vis-a-vis ROW (c)
(a) Eurostat definition. (b) gross saving divided by gross disposable income. (c) as a percentage of GDP.
Cyclically-adjusted budget balance (c)
Real unit labour cost
Imports (goods and services)
General government balance (c)
Unit labour costs whole economy
Inventories
Terms of trade goods