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EC spring 2016 economic forecast: "Romania - Fiscal expansion fuels domestic demand as financial risks increase"
The European Commission has released on Tuesday its spring 2016 economic forecast; for Romania, it is headlined "Fiscal expansion fuels domestic demand as financial risks increase" and it maintains the 4.2 percent growth in 2016, followed by 3.7pct in 2017; both figures are unchanged from the winter forecast released in February.
The EC also repeated its warning on the risks to the macroeconomic outlook, "due to the uncertainty caused by the adoption of a debt discharge law by Parliament on 13 April. This law could have a substantial negative impact on investor confidence and credit outlook."
Inflation is expected to stay negative until mid-2016, when the base effect of the food VAT cut from June 2015 will wear out. The surge in domestic demand combined with accelerating wage growth and the increase of the minimum wage from May 2016 is likely to add to the upward pressures on prices, but the impact of the VAT cut is expected to curb inflation to -0.6pct on annual average. The annual average inflation rate is forecast to increase to 2.5pct in 2017 despite the additional 1 percentage point cut of the standard VAT rate envisaged for January 2017.
The general government deficit is projected to substantially increase in 2016 and 2017 on the back of tax cuts and expenditure increases. In 2015, the general government deficit improved to 0.7pct of GDP, from 0.9pct of GDP in 2014, but it is expected to increase to 2.8pct of the GDP in 2016 and to further deteriorate to 3.4pct of the GDP in 2017. "An additional cut in the standard VAT rate by one percentage point, the abolition of the extra excise duty on fuel and of the special construction tax are expected to have a negative impact on revenues," the document reads.
The EC has reviewed slightly downwards its forecast for the whole EU, with 1.8pct growth in 2016 and 1.9pct in 2017, from 1.9pct and 2.0pct respectively in the winter forecast. Growth will accelerate or remain steady in most member states, with figures still uneven among them.