European Semester 2018 Real Estate Results: Country Report

Introduced in 2010, the European Semester, or ‘EU Economic Governance’, is the annual process by which, on the basis of European Commission analysis, the EU member countries coordinate their economic policies throughout the year and address the economic challenges facing the EU to contribute to the financial stability and economic health of the Union.

Each year, the Commission undertakes a detailed analysis of each country’s plans for budget, macroeconomic and structural reforms. It then provides EU governments with country-specific recommendations for the next 12-18 months.

ROMANIA – COUNTRY REPORT

  • Growth is set to slow but remain robust

Romania’s economic boom has started to cool down in 2018. Real GDP growth slowed from 4.3% to 4.2% between the first and second quarters of the year and is expected to slow further. For the year overall, real GDP growth is forecast at 3.6%. Private consumption, the main contributor to growth, appears clearly to be weakening. This stems from persistently high inflation, mainly due to energy prices, and the fading out of public policies directed at increasing disposable income.

In 2019 and 2020, private consumption is forecast to slow down further as nominal wage growth moderates and inflation continues to weigh on real disposable income. It will nonetheless remain the main driver of growth. Investment is expected to increase its contribution to growth on the back of an increase in non-residential construction.

  • The labour market continues to tighten

Unemployment in Romania fell to a new historical low of 4.3% in spring 2018 and is set to stay at a broadly similar level over the forecast horizon. The tight labour market conditions suggest that wages should continue to grow, with some expected spillovers from the public to the private sector, but the pace will likely slow. This should reduce pressure on unit labour costs, which are nonetheless forecast to rise moderately in 2019 and 2020.

  • Inflation is set to rise

Headline inflation continued to grow as the effect of a cut to standard VAT rates and excise duties on fuel, made in January 2017, faded away. The decision to reverse those cuts in October 2017, added further fuel to the figures. For 2018 as a whole, inflation is forecast at 4.3%, while in 2019 and 2020 it is expected to fall to 3.5% and 3.3% respectively on account of weakening domestic demand.

  • Risks tilted to the downside

A main risk to the forecast is that wage growth could continue to outpace productivity growth, causing Romania’s economic competitiveness to decline further and weaken export growth. Uncertainty regarding the government’s policies, with potential negative repercussions on the business environment, and the challenge of budgetary deficit targets could hamper investment decisions. On the other hand, an improved absorption of EU funds represents a positive risk for GDP growth in 2019 and 2020.

  • Public deficit set to increase

Gross wages in the public sector were raised by 25% with even higher increases in the health and education sectors. The fiscal cost of these increases to gross wages was partially compensated for by a shift in the burden of social security contributions from employers to employees (from 22.75% and 16.5% to 2.25% and 35% respectively).

The general government deficit is projected to increase to 3.4% of GDP in 2019 and 4.7% in 2020. This projection is mostly driven by plans to significantly increase the pension point (the main parameter used for pension indexation), included in the governing programme and implemented through the pension law recently adopted by the government. The pension point is set to increase by 15% in September 2019 and 40% in September 2020.

 

Source: www.ec.europa.eu

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