“We do not rule out a modest overheating of the local economy this year, as the country seems now on pace to close the negative output gap, which persisted for the last seven years,” the report reads.
Romania is likely to see a 4.1% GDP growth in 2016, while Poland’s economy could grow by 3.6%, Slovakia’s by 3.5%, the Czech Republic’s by 2.5% and Hungary’s by 2.2%.
Romania’s GDP grew 3.7% year-on-year in 2015, fueled by domestic demand and higher investments and private consumption, which were backed by growing wages, low interest rates and falling prices. Given the broad fiscal easing and higher wages in the public sector enforced by the government last year and early this year, the budget deficit could soar to almost 3% of GDP in 2016, in parallel with a spike in the structural deficit to above 3%, as the local economy is likely to grow to potential, the report reads.
In absence of proper remedies, Erste said the budget deficit might continue to swell in 2017 and the election year could also complicate things even more, as the technocratic cabinet is likely to face further pressure for additional pay rises from various professional groups.
On the monetary policy front, Erste expects the central bank to raise its key rate to 2% in the last quarter of 2016 and further to 2.25% in the subsequent quarter, as it sees great chances of inflation jumping above 2% in the first quarter of 2017. BNR’s monetary policy rate has stayed at 1.75% since May 2015, when it cut it from 2.0%.
The economic growth in the CEE got ahead of the GDP growth in emerging countries, such as Brazil, Russia, India and China, but also ahead of European economies, with an estimated growth rate of 3.1% for 2016, almost double the average of Eurozone countries, of 1.6%, according to Erste report.