We are nearing the end of yet another atypical economic year, marked by the persistence of the health crisis, the recovery in activity and a build-up of challenges, including mounting inflationary pressures, higher commodity prices and political tensions.

Even so, Romania’s economy has proved resilient to the onset of the pandemic and its consequences (unprecedented globally over the past century), as well as to this year’s related challenges. This resilience of the domestic economy is driven mainly by an improving contribution from the factors of production to the annual dynamics of potential GDP, according to our econometric estimates.

For 2022 we expect Romania’s economy to grow slightly above potential, at 5.2%, but to decelerate compared with 2021 (6.2%). This scenario is underpinned by favourable prospects for productive investment, with positive spillovers to the other GDP components.

Thus, the growth engine could accelerate from 7.6% in 2021 to 10% in 2022, supported by low real financing costs and the implementation of programmes launched by the European Union in response to the health crisis (NextGenerationEU and the 2021–2027 Multiannual Financial Framework).

Faster growth in productive investment will help improve labour market conditions — the average annual unemployment rate is expected to decline from 5.2% in 2021 to 4.8% in 2022.

In our baseline scenario, private consumption (the main component of GDP) could slow from 6.9% in 2021 to 5.5% in 2022, as base effects fade (following the restrictions introduced to counter the health crisis).

For public consumption we forecast an acceleration from 0.3% in 2021 to 3% in 2022, largely driven by implementation of the National Recovery and Resilience Plan.

On the external side, we expect the annual growth rates of exports and imports in 2022 to slow to around 4.5% and 7.2%, respectively, as the base effects generated by earlier restrictions dissipate. 

For consumer prices (on the EU-harmonised index) we forecast an increase in the average annual rate from 4.1% in 2021 to 5.1% in 2022, driven by recent supply-side shocks in a context of post-pandemic economic recovery.

Even so, in BT’s scenario we expect the annual rate of consumer price inflation to start slowing from early 2022 and to converge towards the National Bank of Romania’s target by end-2023, as supply-side shocks fade and the central bank’s measures (the post‑pandemic monetary cycle launched in 2021) take effect.

In our baseline scenario we expect the National Bank of Romania to continue this cycle in 2022 by raising the policy rate and widening the corridor formed by the rates on standing facilities around the key policy rate.

For the 10-year government bond yield (a benchmark for funding costs across the economy) we forecast a higher annual average of 5.2% in 2022 (from 3.7% in 2021), on expectations for monetary policy (in the US and Romania) and for the annual pace of nominal GDP.

Lastly, on the FX market we forecast a continued gradual rise in EUR/RON towards a 2022 average of 5 (up from 4.92 in 2021).

We stress that Romania will continue to face twin deficits in 2022, but we forecast an adjustment in their share of GDP, a scenario supported by prospects for an acceleration in structural reforms.

We conclude by flagging the risk factors to the outlook for the domestic economy in 2022, including the possibility of a sharp deterioration in international financial market conditions (after strong gains in equity indices over recent quarters), the persistence of the health crisis, the domestic political environment and the regional geopolitical context.

Forecasts for the evolution of Romania’s macro-financial indicators

Source: BT forecasts using data from Eurostat, INS, NBR, Bloomberg

Editor: Dr. Andrei Radulescu, Director of Macroeconomic Analysis, Banca Transilvania