Short term gain, long term pain? (Demo)

Romania’s economy has been riding high for the last couple of years, buoyed by tax cuts and pay rises for public sector workers. The populist measures, most of them adopted in the run-up to the December 2016 general election, have resulted in a boom in consumption.

By Clare Nuttall

This has been good news for the economy, which expanded by well over 4% in 2016, according to assessments by international financial institutions, a return to the type of growth rates not seen since the mid-2000s and mainly driven by consumption. This trend is set to continue; the latest GfK Consumer Confidence barometer showed that in the first quarter of 2017, confidence reached its highest level since the start of the international economic crisis.

Consumer oriented sectors are benefiting from this trend, which coincides with the ongoing evolution of the retail sector from “informal” retail like open air markets to “formal” retail – as seen by the opening of more and more supermarkets and shopping centres across the country. Online retail, while still accounting for the lowest share of total retail turnover among EU countries, is also gathering pace.

Adding to the feel-good factor, Romania’s unemployment rate is at a post-crisis low. High emigration levels and an increasing shortage of skilled workers are adding to wage pressure, especially in the growing IT sector. With international IT and outsourcing companies continuing to invest into Romania, there are no signs of this trend abating.

Going forward, growth is expected to remain largely driven by consumption, though with the boom seen in the last 18 months gradually tapering off.

Romania’s local economic forecasting body, the Comisia Nationala de Prognoza (CNP), has maintained its optimistic forecast of 5.2% GDP growth this year. It’s well above those from the likes of the International Monetary Fund (IMF), the European Bank for Reconstruction and Development (EBRD) or the European Commission, even though both the IMF and the EBRD recently raised their projections for this year to 4.2% and 4% respectively.

How long the current boom will last and how steep the slowdown will be depend to a large extent on the government. Rising wages have been the main driver for increased consumption and the left-wing Social Democratic Party (PSD) promised further public sector pay hikes before it was re-elected in December. It now has to figure out how to deliver on these while preventing public spending from ballooning to unmanageable heights.

The pro-cyclical fiscal policies pursued both before and after the election are potentially storing up problems for the future. Accepted wisdom is that governments should save when times are good and spend when they are bad and the government needs a boost. Instead, Bucharest has been fuelling the boom at a time of high growth.

“The main risk to the outlook is the possibility of further fiscal stimulus,” the European Commission warned in its Spring Forecast published in May. The IMF has already said that Romania’s budget deficit will rise to 3.7% of GDP this year and 3.9% in 2018, pushing Romania past the 3% threshold to activate the EU’s excessive deficit procedure.

While the consumption boom has been good for many Romanians, what the economy really needs if it is to grow faster in the longer term, is investment. Yet the government’s expansionary spending is likely to take place at the expense of investment into infrastructure, which would create new jobs and address some of the concerns of investors.

Clare Nuttall is a Bucharest-based journalist specialising in Eastern Europe. Currently news editor at bne IntelliNews, she has been with the magazine since 2008, initially in Kazakhstan and more recently in Romania. Clare has also written for the Financial Times and the Economist Intelligence Unit.

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