| Domestic demand drives growth |
| Economic activity picked up at the start of 2024, after relatively modest GDP growth in the prior year. Household consumption surged, driven by increases in pensions and public sector wages and it will continue to be one of the main drivers of economic expansion in 2025. It will be supported by further real wage growth amid a tight labour market, with Romanians continuing to spend rather than increase their savings. It has already been reflected in retail sales data that shows solid growth momentum. The same cannot be said for manufacturing production, which is driven mostly by external demand. Reduced demand from Romania’s main export markets has led to the contraction of industrial production since late 2022 and the uncertain recovery of external markets still carries a crucial risk for the Romanian economy. Investment in public infrastructure will continue to contribute to growth thanks to inflows of funds under the Next Generation EU programme if there are no delays in scheduled projects. In respect of EU funds, Romania has already disbursed grants and loans totalling EUR 9.4 billion (3.3% of its annual GDP) from the Recovery and Resilience Facility (RRF). |
| Following spiking inflation in early 2024 due to increases in indirect taxes, the disinflation trend is expected to resume, however to a lesser extent than previously. It could include further random spikes like the one recorded in July 2024, when inflation increased to 5.4% (year-on-year) from 4.9% in June 2024 due to the scheduled increase of gas prices. The acceleration of energy prices will be initially restricted owing to legislative changes to retain the electricity and natural gas price-capping scheme until the end of March 2025. Nevertheless, substantial wage and pension increases will exert upward pressure on both goods and services prices, thereby keeping the already persistent core inflation significantly above headline inflation. Core inflation (excluding unprocessed food, energy and administered prices) remained high at 5.7% in June 2024. |
| Despite receding headline inflation since its peak in late 2022, the National Bank of Romania (NBR) was not eager to enter a monetary easing cycle. In contrast to peers in Central and Eastern Europe which started the process earlier, the NBR chose to cut its main policy rate by 25 basis points in both July and August 2024. The NBR’s decision followed on the heels of the European Central Bank’s (ECB) first interest-rate cut in June and means that businesses and consumers will enjoy some relief from high borrowing costs over the next few quarters, especially given that the monetary easing is expected to continue. Weak growth prospects in main EU trading partners are weighing on exports (which mostly consist of electrical and electronic equipment, vehicles, machinery and minerals), while imports are accelerating in step with the recovery of domestic demand, leading to a negative contribution of net exports to GDP growth. |
| Twin deficits remain high |
| The budget deficit is expected to remain high. Despite the target of 3% of GDP agreed with the European Commission, such a level is too ambitious, and the deficit will remain above 6% of GDP both in 2024 and 2025. Government expenditures are the main driver due to accelerating public wages, recalculations of pensions and defense spending. Revenues will not balance despite being contributed by solid consumption growth and improving tax collection. In July 2024, the EU Council determined that Romania, already under the excessive deficit procedure (EDP) since 2020, has not taken effective steps to reduce its deficit and the EDP remains open. As a result, Romania will face more pressure from the EU to improve debt sustainability. That could affect disbursements of EU funds, especially considering the restrictive EDP procedure. The high budget deficit results in negative implications for public debt levels, bond yields and borrowing costs making foreign financing available at a higher cost than in other CEE countries due to Romania’s weaker credit ratings. |
| Public investment us expected to remain on a relatively high level thanks to spending on a municipal level and disbursements of EU funds. In terms of the latter, the current government increased investments. The EU’s RRF for Romania is focused on public investment in education, infrastructure, healthcare, innovation and digitalization and accelerating the green transition (with 44% of the available funds directed to climate objectives). |
| The traditional goods trade deficit, partly offset by the surplus on the services account, mostly thanks to transport and ICT services, will result in the current account deficit remaining wide. Despite an expected gradual recovery in 2025 in key EU export markets, strong domestic demand will mean the trade deficit stabilizes close to current levels as a percentage of GDP (9%). |
| Crowded election calendar with the grand coalition expected to remain in government |
| The first half of 2024 saw local and EU elections take place. Parliamentary and presidential elections are meanwhile scheduled for November and December 2024. Until that time, Romania's two main political rivals, the centre-left Social Democratic Party (PSD) and the centre-right National Liberal Party (PNL), are governing together in a coalition known as the National Coalition for Romania (CNR), holding a sizeable majority in both houses of parliament. PSD holds 107 seats and PNL holds 79 seats in the House of Representatives. The coalition has been stable since it was created in November 2021, in sharp contrast to Romania's previous short-lived minority governments and political turbulence. The planned rotation of ministers (including the Prime Minister) between the parties took place in July 2023. An ongoing PNL?PSD coalition arrangement is the most likely scenario following the next parliamentary elections. The main risk to political stability stems from the rise of the pro-Russian far-right ultranationalist party, the Alliance for the Unity of Romanians (AUR) which garnered 15% of the vote in the European Parliament elections. Opinion polls in mid-2024 manifested similar support for the AUR at the upcoming parliamentary elections, while the PNL-PSD coalition was slated to receive nearly 50% of the vote. That said, the other right-wing alternative has been confirmed by the liberal Save Romania Union (USR) which formed the United Right Alliance (ADU) with two small extra-parliamentary parties. |
| The incumbent president, Klaus Iohannis from the PNL will not be able to stand for another presidential term as the Constitution only permits a maximum of two terms. The mid-2024 opinion polls indicate that current Prime Minister Marcel Ciolacu, head of PSD party, leads his main rivals by a substantial margin. The President’s role is mostly focused on foreign affairs and defence. |
| Romania is not a member of the eurozone and is not expected to become one until it meets membership criteria, according to the latest European Commissions’ Convergence report. Surveys show steady public support for joining the euro area (over 70% since the start of the decade) and Romania last year set a target to join the euro by 2029. However, President Klaus Iohannis questioned the allocation of a timeframe. Meanwhile, Romania has taken a new step towards EU membership by partial entry in March 2024 in the Schengen area by lifting air and sea border checks. Among the current NATO members, Romania has the second-longest border with Ukraine. NATO has stationed a military presence in Romania and has started expanding a military base near Constanta, which will eventually be capable of permanently accommodating 10,000 NATO troops. Romania is also crucial in terms of the transit of Ukraine's grain exports via land and sea. |
