The World Bank revised upwards its GDP growth estimations for 2019, 2020 and 2021 in its latest Europe and Central Asia Economic report, compared to the June and April forecasts. Figures were revised up in April as well, after the government adjusted a controversial governmental bill comprising measures that were perceived as having a notable negative impact in the economy. The upward revision in the current report were most probably grounded on a better-than-expected performance in construction and gross fixed capital formation. Even so, economic growth is expected to moderate over the medium term in line with long-term potential, as the available fiscal space shrinks and labor market tightens, the Bank explained.
Still robust consumption and depreciation pressure on the local currency made the WB revise upwards the inflation forecast, too. CPI growth is expected to return to the NBR’s target interval (2.5%+/-1pp) only at the end of the forecast interval, in 20121, although remaining in the upper band. The twin deficits are still projected to further widen even stronger than estimated in April. Besides, the WB thinks that the fiscal measures implemented in recent years coupled with political uncertainties in the context of election years will make fiscal balances unlikely to be contained. Thus, the general government gap is seen exceeding 3% of GDP next year and in 2021, chiefly on the back of planned wage increases in the public sector and pension hikes scheduled in the pension law. The two measures will add 0.8pps of GDP to public expenditure in 2019 and 1.7pps in 2020, according to WB calculations.
Overall, the WB sees stronger economic growth in medium-term, mainly fueled by private consumption, and a decline in poverty incidence over the continued boost in incomes. However, those developments will also trigger higher deficits that may very likely affect public investment and increase the country’s resilience to external shocks. Risk and challenges are seen to come from uncertain fiscal policy coupled with a tight labor market, the expected slowdown in Romania’s main export markets coming on top of an uncorrelated wage dynamics with labor productivity, the WB mentioned. The Bank advised on improving labor participation and tacked high youth unemployment, to switch fiscal policy focus from boosting consumption to investment, to improve regulatory predictability and to focus on reforms in public administration and state-owned companies.