Romania country note: OECD Economic Outlook, May 2021

124 

Romania Output in the Romanian economy is projected to increase by 6% in 2021 and 4.6% in 2022. Investment and pent-up demand will be the main growth drivers. Consumption will pick up as the vaccination rollout progresses and restrictions on activities are eased, leading to a decline in saving. Imports will increase faster than exports due to strong domestic demand. The unemployment rate will decrease gradually as the recovery gains momentum, returning to its pre-crisis level in 2022.

Fiscal policy should remain accommodative until the recovery is firmly underway. Efforts to increase revenues, mainly through improvements in tax collection, should be strengthened. Romania is set to receive significant amounts of EU funds, which, if swiftly and effectively absorbed, will be crucial for boosting investment and supporting vulnerable firms and individuals, given the limited fiscal space. Greening the energy mix, developing digital infrastructure and reducing regulatory barriers to competition are essential to achieve a sustainable recovery.

The third wave of COVID-19 infections put pressure on the healthcare system Although there were less infections than during the second wave in the autumn, the number of patients in intensive care units reached record high levels at the end of April, putting hospitals under huge pressure.

The authorities introduced a nationwide curfew as well as specific restrictions on schools and business operations that vary across counties, depending on the rate of infections and testing. As of 15 May, a gradual easing of restrictions has started with the end of the curfew and masks no longer obligatory in outdoor public places. The relaxation of measures is expected to continue until the summer. The vaccination campaign has started slowly, as in most other European countries, but is expected to accelerate with the receipt of more vaccine doses and the opening of new mobile vaccination centres; the official aim is to vaccinate half of the population by the end of September.

Romania GDP rebounded quickly

Public debt will continue to increase Maastricht definition

Index 2019Q4 = 100 115

% of GDP 60

Current growth path

110

55

Pre-crisis growth path¹

105

50

100

45

95

40

90

35

85

30

80

2020

2021

2022

0

0

2015

2016

2017

2018

2019

2020

2021

2022

25

1. The pre-crisis growth path is based on the November 2019 OECD Economic Outlook projection, with linear extrapolation for 2022 based on trend growth in 2021.

Source: OECD Economic Outlook 106 and 109 databases.

StatLink 2 https://stat.link/p2ywut

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021

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Romania: Demand, output and prices 2017

Romania GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1

2018

2019

2020

2021

2022

Percentage changes, volume (2010 prices)

Current prices RON billion

857.9 543.3 134.8 192.2 870.3 8.7 879.1 360.5 381.7 - 21.2

4.5 7.7 3.3 -1.1 5.2 0.6 5.9 5.3 8.6 -1.6

4.1 4.1 6.9 13.0 6.4 -1.2 5.1 4.6 6.8 -1.2

-3.9 -5.2 2.0 6.8 -1.1 -1.2 -2.3 -9.7 -5.1 -1.6

6.0 4.8 4.5 4.6 4.8 1.3 6.2 11.2 11.4 -0.6

4.6 6.1 1.5 6.9 5.4 -0.2 5.0 5.0 6.1 -0.7

_ _ _ _ _ _ _ _ _

6.2 4.6 2.8 4.2 -6.4 -2.9 43.6 34.7 -4.6

6.8 3.8 3.2 3.9 -2.8 -4.4 44.4 35.3 -4.9

3.8 2.6 3.7 5.0 5.9 -9.2 59.2 47.3 -5.2

5.7 3.3 3.6 4.7 3.2 -7.9 63.5 51.6 -4.9

3.1 2.8 2.4 3.9 1.1 -6.4 67.2 55.3 -4.7

Memorandum items GDP deflator Consumer price index Core consumer price index2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP) 1. Contributions to changes in real GDP, actual amount in the first column.

2. Consumer price index excluding food and energy.

Source: OECD Economic Outlook 109 database.

StatLink https://stat.link/h8yk27

The recovery has been strong The recovery was faster than expected in the second half of 2020, on the back of a strong rebound of industrial production and retail sales. Transport, hospitality and agriculture were the most affected sectors in 2020, while construction proved to be particularly resilient, growing by 10%. The strong recovery continued in the first quarter of 2021, with GDP reaching its pre-crisis level. Exports were particularly buoyant and business confidence recovered. Inflation picked up strongly on the back of electricity market liberalisation and rising fuel prices. Wage pressures remained but labour market conditions deteriorated, with the unemployment rate reaching 5.5% in March, from 3.9% before the pandemic.

Policy measures continue to support the economy A range of policy measures to support workers and firms affected by the crisis have been extended in 2021, including the short-time work scheme, loan payment deferrals and tax reliefs. The short-time work scheme is currently planned to remain in place until the summer, while the moratorium on bank loans will be maintained until the end of the year. Fiscal support should continue until the recovery is well underway, supported by significant EU funds. Monetary policy has remained supportive, with another cut of the policy rate to 1.25% in January 2021. The National Bank of Romania is expected to maintain low interest rates as inflation should remain in its target band.

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021

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The pace of recovery is uncertain GDP growth is projected to increase by 6% in 2021 and 4.6% in 2022. Private consumption is expected to accelerate on the back of pent-up demand and lower household saving. The disbursements of EU funds will stimulate investment in 2021 and 2022. Exports will bounce back as global supply chains recover. The public deficit will remain higher than in other Central and Eastern European countries and public debt will increase significantly to 55% of GDP in 2022 (Maastricht definition), 20 percentage points above its precrisis level. The outlook is uncertain and hinges on vaccine deployment. A deterioration of investor confidence in emerging-market economies could trigger a downgrading of Romania’s credit ratings and an increase in borrowing costs. On the other hand, a more effective absorption of EU funds than assumed would boost investment and help to implement the necessary structural reforms for a sustainable recovery.

Preparing for a more inclusive and green recovery requires additional measures Policy support should continue until the outbreak is under control together with structural reforms to improve the business environment, including streamlining the license and permit system. In the longer term, improving tax collection will be necessary to put public finances on a sustainable path. At the same time, the tax and benefit system should be made more progressive to reinforce social protection. The effective absorption of the Next Generation EU funds could help Romania to address social and environmental challenges. Given the high levels of air pollution, greening the energy mix and reducing harmful emissions, in particular in the residential sector by replacing inefficient heating sources and improving the insulation of buildings, are priorities. Accelerating the digital transition in the education system, while strengthening support to vulnerable students, could mitigate the negative impact of the pandemic on inequality.

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021