Romanian Economy to Grow by 1.8% YoY in 2023

According to the report by the World Bank, they estimate that the Romanian GDP will grow by 1.8% YoY in 2023. In this overview, we’ll go through the key points of the report.

According to the World Bank, Romania has made impressive improvements in its economic performance and prosperity over the past two decades, converging with the EU’s living standards. However, the country faces challenges, such as weak institutions, a shortage of skilled workforce, poor connectivity, and low resilience to natural hazards, among others. Furthermore, the country faces a constantly high at-risk-of-poverty rate, compared to the EU peers with similar or lower per capita incomes. This could further worsen due to ongoing inflation, especially among lower-income groups. In fact, according to the Bank, a 3.1 p.p. inflation gap existed between Romania’s lowest and highest quintiles.

Work will have to be done on improving this situation, and they remain the key short-term challenges. Achieving a sustainable recovery and supporting fiscal consolidation efforts will depend on implementing structural reforms in key areas, including education and health sectors, public administration, tax, and pension systems, and finally, the decarbonization reforms along with efficient use of EU funds.

In H1 2023, Romania’s GDP grew by 1.7% YoY, mainly supported by private consumption which grew by 3.9% YoY, due to higher wages and stable levels of unemployment. Investments also supported GDP growth, increasing by 11.2% YoY, supported by the EU funds. Changes in inventories had the largest negative impact on the GDP. In spite of weakening export volumes, trade and current account deficits narrowed, supported by higher services surplus and modest import compression. Construction growth continued at 6.8%, albeit this represents a slowdown both in residential and non-residential constructions. Industry continued to decline, at -3.3% YoY, due to elevated production costs, especially in the energy-intensive sectors.

Moving on to the outlook, the growth is projected to decelerate to 1.8% in 2023. In 2024 and 2025 however, it is expected to pick up again, estimated at 3.7% and 3.9%, respectively. The main drivers of this growth would once again be private consumption as well as EU funds’ aided investment. This outlook depends on several factors, including the extent and duration of the war in Ukraine, as well as its repercussions on the European economy, combined with the fluctuations in global prices and domestic inflation. Furthermore, Romania’s ability to efficiently absorb the EU funds will be critical for future growth.

On the other hand, the fund-associated structural reforms will also be critical for supporting a sustainable reduction of the fiscal deficit over the medium term, particularly aimed at reducing inefficient expenditures and strengthening revenue mobilization. Furthermore, improvements in life-long skill formation and private capital mobilization will also play a crucial role in boosting potential growth. Because of the growth slowdown, 2024 may see slower poverty reduction. However, the poverty trajectory will hinge on the duration of the war in Ukraine and its impacts on food and energy prices, as well as the approach to tackling the fiscal deficit while protecting the poor. As such, the Government’s role in mitigating energy cost effects through targeted support is vital.

The entire report can be accessed here.

World Bank current key indicators and forecast for Romania (2022 – 2025, %)

wdt_ID Indicator 2022 2023e 2024f 2025f
1 Real GDP growth, at constant market prices 4,70 1,80 3,70 3,90
2 Private consumption 5,50 3,70 4,50 4,80
3 Government consumption 4,30 2,90 1,40 1,20
4 Gross fixed capital investment 8,00 7,90 7,20 7,50
5 Exports, goods and services 9,60 0,70 5,80 6,30
6 Imports, goods and services 9,90 1,20 7,50 8,00
7 Inflation 13,80 10,10 5,40 4,20

Source: World Bank, InterCapital Research

Category : Flash News

Want to invest? Do not know how and where? Contact us and we will solve everything for you.