Romania’s economic growth is expected to slow down in 2014. Exports should be the main growth driver. The prospects for domestic demand, however, are not bright. The economy’s performance should improve in the medium term. The performance of the energy and transport sectors is a bottleneck that must be addressed by structural reforms. Labour costs have declined, helping to enhance the competitiveness. However, nearly 3 million young adults – many of them highly qualified – have emigrated in the past decade. In 2004-2008, Romania's real GDP growth averaged more than 6.0% per year and investment surged following the country's entry in the EU. A boom in consumer spending was driven by a rapid rise in borrowing which left Romania highly vulnerable when the global financial crisis hit.
The economy entered a sharp recession in 2009 when domestic demand contracted and capital inflows abruptly fell. The deterioration forced the government to turn to the IMF and the EU for loans. A rebound occurred in 2011 but the economy stagnated in 2012 when domestic demand slumped and exports plummeted. Unemployment has remained high, but labour market reforms contributed to a recovery in employment. Growth improved in 2013 when external demand picked up although domestic demand remained weak.
Romania faces a host of problems. It has the lowest income per capita in central Europe, the weakest environmental standards, the largest tax arrears, the most pervasive corruption and the lowest education spending. With strong trade and financial sector linkages with the eurozone, Romania is particularly vulnerable to the regional economic slowdown.
Real GDP growth is expected to slow down from 3.5% to 2.6% in 2014. Exports should be the main growth driver. The prospects for domestic demand, however, are not bright. The economy grew by 5.2% year-on-year in the last quarter of 2013, the fastest growth in more than two years.
Prices rose by 4.0% in 2013. Average annual inflation is expected to be 1.6% in 2014, roughly in line with the central bank's target.
In real terms, private final consumption rose by 5.9% in 2013 and gains of 5.0% are expected in 2014. Tax increases imposed as part of the programme of fiscal consolidation slow the recovery of consumer spending. Credit will increase very little as households continue to repair their balance sheets. Somewhat stronger rates of growth are forecast over the next several years but gains will not match those experienced prior to the recession.
Unemployment was 7.3% in 2013 and is expected to edge down to 7.2% in 2014. Labour costs have declined, helping to enhance the competitiveness of the economy. However, according to the National Institute of Statistics, nearly 3.0 million young adults – many of them highly qualified – have emigrated in the past decade. To tackle the problem Romania's government has introduced a series of measures to attract young émigrés home. These measures include grants worth up to 100,000 euro to set up a new business and subsidies to lower mortgage costs for firsttime home buyers.
A significant portion of the FDI goes to lowskill industries such as textiles and leather goods. Another 15-20% of FDI has found its way into retail and wholesale operations. Romania needs to attract more green-field investments in export-oriented manufacturing and services that demand higher skills.
Evaluation of market potential
Economic growth rate should accelerate in the medium term with real GDP growing by
up to 3.7% per year. Domestic demand should gradually provide more support with employment and investment also expected to strengthen. Some help will come from the 30 billion euro fund the EU has set aside to modernise Romania. However, the country's ability to absorb EU funds is still questionable.
The country's monetary and fiscal constraints should ease as the economy improves. The domestic market is still immature and has considerable potential to grow. Convergence to the EU living standards will depend on increased investment and greater employment creation. More progress in structural reform is needed to prepare for eventual euro adoption.
In the longer term, the ability to achieve sustainable rates of growth will require the government to clear its arrears, improve the quality of spending and boost tax collections. Performance of the energy and transport sectors is a bottleneck that must be addressed by structural reforms. The energy sector is dominated by state-owned enterprises.
Romanian exporters are heavily dependent on EU markets. The EU's share of Romanian exports amounted to 71.5% in 2013. Exports rose by 13.7% (in U.S. dollar terms) in 2013 and gains of 10.8% are expected in 2014.
Romania's external sector is also heavily dependent on manufacturing with machinery and transport equipment accounting for the highest share of the country's exports – 42.0% in 2013.
The share of exports in GDP has been rising for several years and amounted to 34.7% in 2013, up from 24.3% in 2008. The current account deficit was 1.1% of GDP in 2013 and it will widen to 2.2% in 2014.
The privatisation programme has fallen behind schedule but will accelerate in the future. Altogether, ten state-owned companies are scheduled for liquidation or privatisation. Romania has one of the largest informal economies in the EU – estimated at more than 30% of GDP. The government has taken several steps including an increase in penalties levied on employers for unregistered employees and more rigorous inspections to scale back the informal economy. A flat tax (16%) on personal income and profits is also intended to draw much of the country's sizeable informal economy into the open.
At the beginning of 2014, Romania was obliged to open up its land market to foreign investors. This was one of the requirements of EU membership, but the country was given several years to prepare.
The full deregulation of prices for commercial users of electricity and gas was carried out in 2013. There has been progress in implementing structural reforms but more efforts are needed in the case of the energy and transport sectors. A comprehensive reform of the healthcare system is under preparation to make the system financially sustainable.