By Clare Nuttall
Romania’s economy has accelerated dramatically this year, with the growth rate burning through even the most optimistic of forecasts towards the end of 2017 on the back of booming consumption.
The signs are, however, that the driving forces behind this rampant growth — Romania is on track to be the EU’s fastest growing economy this year — are about to cool off in 2018. The increase in wages especially in the public sector, which in turn has sent consumer spending soaring, is about to be checked.
In fact, growth probably peaked in the third quarter of 2017, when it reached a stunning 8.8% compared to July-September 2016, catching economists off guard as they scrambled to raise their forecasts for the full year. Part of this was due to the bumper harvest this summer; while Romania’s regional peers such as Serbia were hit by drought, the conditions in Romania were just right for agriculture. Still, the latest data from the Romanian statistics office shows that the main contributor to the rise continued to be consumption.
Rapid wage growth is a phenomenon seen across the CEE region, with the likes of Poland, Hungary and the Czech Republic all reporting record low unemployment, while businesses struggle to find workers with the skills they need. It’s a similar story in Romania, where unemployment has also dropped recently, and as the labour market tightens there is strong upward pressure on wages, especially in sectors such as IT and outsourcing where skills are at a premium.
More importantly, though, a series of wage hikes for public sector workers both before and after the December 2016 general election have been a significant contributor to the growth in disposable incomes. But as the New Year approaches, there’s not much festive cheer for civil servants, doctors, teachers or other public sector employees. Promised a 25% pay hike in January 2018, workers were dismayed when the government announced it was rejigging the social security contributions system to shift the entire burden onto employees. This has all but wiped out the anticipated pay rise, with analysts forecasting take home pay will rise by a measly 2%. To a large extent, this is expected to spell the end to the feel-good factor that has stimulated spending recently.
This isn’t necessarily a bad thing. Increased consumer spending has triggered a hike in imports as local manufacturers have failed to keep pace with the hike in demand; for example Eurostat data recently revealed that imports of toys alone soared to €50mn in 2016, seven times more than the country exported. More moderate growth could give a realistic chance for local businesses and international investors to boost capacity to meet demand — provided the government can provide a stable enough regulatory regime for investors to put their money to work with confidence.
There’s no expectation of a hard landing in Romania; forecasts for next year are still among the highest in the EU, with the Romanian finance ministry anticipating growth of 5.5% in 2018, while both the International Monetary Fund (IMF) and the European Commission have somewhat less optimistic projections of 4.4%.
But economic performance is also going to depend on policy coming out of Bucharest, both from the government and the central bank. Associations representing foreign investors have already warned their members put new projects on hold in 2017 due to the regulatory uncertainty in the country, especially concerning the tax regime. If the government doesn’t manage to restore confidence, this could continue to inhibit investment next year. Meanwhile, the central bank has indicated that now inflation has started to rise again it is mulling a tightening of monetary policy, with a rate increase likely in the first quarter of next year.
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.