In its June 2021 forecast, the EBRD predicted a 6% GDP growth in 2021. Instead, the bank cut its GDP growth forecast for 2022 by 0.6 percentage points.
Analysts emphasized that the unpredictable evolution of the COVID-19 pandemic, considering the low vaccination rate in Romania, poses risks to predictions.
In 2020, Romania’s economy contracted 3.9% and in the first two quarters of 2021 it grew 7%, reaching at mid-2021 the pre-pandemic levels. However, risks have increased lately. Consumption remains the main GDP growth engine, but investments saw a significant upward trend, growing by 12% year-over-year.
According to the EBRD, exports of goods picked up towards the end of 2020 and kept going up in 2021, but the growth pace moderated due to supply chain disruptions. Imports climbed almost 10% in the second quarter of 2021, compared with the fourth quarter of 2019. Consequently, net exports will again have a negative contribution to the GDP in 2021.
Romania’s budget deficit is expected to remain high in 2021, to nearly 7.1% of the GDP, considering that the improvement in revenue was offset by a significant increase in expenditure at the last budget revision, the EBRD also said in its report.
In early October 2021, Romania’s central bank raised the key rate to 1.5% a year from the all-time low of 1.25%. It also raised the deposit facility interest rate to 1% from 0.75% a year and the lending (Lombard) facility interest rate to 2% a year from 1.75% a year as of October 6.
The EBRD also raised its forecast for its regions for 2021 to 5.5% in its latest Regional Economic Prospects report, published on Nov 4. While this represents an upward revision of 1.3 percentage points over its June forecast following a strong performance in the first half-year, the Bank warns of serious threats ahead.
High commodity and energy prices, tight labour markets, supply chain disruption and currency depreciations in some EBRD economies have begun to push up inflation even before the latest spike in Covid-19 infection cases. On average, inflation in the EBRD regions exceeded its end of 2019 levels by 3 percentage points in September 2021. In response, a number of central banks in the EBRD regions have raised policy interest rates. In some EBRD economies tight labour markets added to inflationary pressures with a strong rebound in vacancies in lower-medium skilled occupations. In other economies, considerable slack in labour markets remains. Unemployment increased by 1.4 percentage points on average between February and August 2020, while labour force participation fell by half a percentage point on average, the report reads.
EBRD Chief Economist Beata Javorcik said: “This is a bittersweet recovery. The first half of 2021 brought a robust rebound. But we are now seeing growing cause for concern. While high commodity prices benefit exporters, they weigh heavily on the trade balances of importers. The supply of affordable energy as we enter the winter period is becoming a serious worry, especially since governments’ headroom is limited.”
Following large stimulus packages in response to the Covid-19 crisis, public debt in the EBRD regions has increased by an average of 13 percentage points of GDP since the end of 2019. While borrowing costs remain below their pre-crisis levels in most economies, they have risen sharply in some countries.
The recovery gathered pace in the EBRD regions in the first half of 2021 when output grew by 6.4 per cent year-on-year. Mobility recovered earlier than in other parts of the world, while industrial production and retail sales rebounded. Exports of goods and services increased despite temporary supply chain disruptions. Remittances also grew in the second quarter of 2021, in some cases surpassing 2019 levels. Tourist arrivals exceeded expectations, but remained significantly below their 2019 levels in most EBRD economies, per the EBRD report.
In 2022, as economies recover, growth is expected to moderate to 3.8% in the EBRD regions. This is 0.1 percentage point lower than expected in June 2021. However, forecasts are subject to high uncertainty, reflecting risks associated with the future path of Covid-19, possible worsening of external conditions and weaker growth in trading partners.
More widespread inflationary concerns may bring forward policy tightening in advanced economies, making debt burdens more expensive to service, the report warns. Travel restrictions and lingering fears of contagion continue to weigh on the outlook for the tourism sector. While bankruptcies have so far remained contained, further vulnerabilities may surface once policy support is reduced, the report also shows.