EC Expects Romania’s Inflation Rate To Rise Gradually, Budget Deficit To Reach 3.5% Of GDP

Romania’s inflation rate is expected to rise and the budget deficit is seen widening due to tax cuts and higher public spending and the unitary pay bill is a huge risk for fiscal estimations, the European Commission said in its spring forecast released on Thursday.

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The EC said the unitary pay bill in the public sector “poses a significant risk to the fiscal forecast, with a potential impact on the general government balance of up to -2% of GDP in 2018.” Romania’s ruling Social Democratic Party (PSD) made public the unitary pay bill on April 10.

According to EC’s forecast, the increase in Romania’s real GDP is expected to stay strong, on the backdrop of fiscal relaxation and wage raises. The unemployment rate saw a significant decline in 2016 and is expected to stay at a low level in 2017 and 2018.

The current government deficit is expected to deteriorate due to strong domestic demand and increased imports. The general government deficit is expected to reach 3.5% of GDP in 2017 and 3.7% in 2018, the EC’s report also reads.

As a consequence of fiscal relaxation, Romania’s structural deficit is expected to increase from nearly half a percent of GDP in 2015 to 2.5% in 2016 and 4% in 2018. Despite strong GDP growth, the debt-to-GDP ratio is thus expected to rise from 38% of GDP in 2015 to 40.9% in 2018.

The EC also said the inflation rate is expected to rise gradually and return to the standards set by Romania’s central bank (2.5% ± 1 percentage point), triggered by intense local demand, wage raises and additional fiscal stimuli. The average annual inflation is envisaged at 1.1% in 2017 and 3% in 2018.

The increase in exports is estimated to remain moderate, in line with the GDP growth, due to reduced competition amid wage raises on the backdrop of improved productivity.

The overall number of employees is seen rising at a moderate pace in 2017 and 2018, and the unemployment rate is expected to decrease further. The jobless rate fell to a record low in 2016.

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