Country Forecast Sample

Country Forecast Romania - Main report: June 12th 2007

Romania at a glance: 2007-08

OVERVIEW

Since Romania joined the EU in January, political disagreements between the National Liberal Party (NLP) and the Democratic Party (DP), as well as between the prime minister, Calin Popescu Tariceanu of the NLP, and the president, Traian Basescu of the DP, have plunged the country into turmoil. Mr Tariceanu has restructured the government to exclude the DP, and a minority government comprising the NLP and the Hungarian Democratic Union in Romania (HDUR) is being supported in parliament by the Social Democratic Party (SDP), the largest opposition group. Mr Basescu has returned to office after parliament's failed attempt to impeach him and is continuing his campaign to bring about an early parliamentary election. Romania's political malaise is thus likely to persist, with negative consequences for EU-related reforms and economic policymaking in general. Lax fiscal and wages policies will fuel domestic demand, generate inflationary pressures and drive up the average annual current-account deficit to about 12% of GDP in 2007-08.

Key changes from last month

Political outlook
Mr Basescu has returned to office after his opponents failed to win a majority in favour of his impeachment in the May 19th referendum. He is continuing a campaign to oust the prime minister, so that more political instability is likely.

Economic policy outlook
The government continues to target a budget deficit of almost 3% of GDP in 2007 and is not expected to tighten fiscal or wages policies sufficiently to prevent a resurgence of inflationary pressures later this year.

Economic forecast
Real GDP grew by 6% year on year in the first quarter of 2007, driven by strong consumption and investment growth. This resulted in an increase of more than 120% in the current-account deficit to €3.1bn (US$4.2bn) compared with the year-earlier period, adding to concerns about the economy overheating.

Romania--highlights: Political outlook

• Although Romania's political system will remain stable, a coherent majority government is unlikely to emerge in the next five years. The minority coalition between the National Liberal Party (NLP) and the Hungarian Democratic Union in Romania (HDUR) may hang on until the next scheduled parliamentary election in November 2008 with the support of the Social Democratic Party (SDP), which would lose seats in an early election. If there were an early election, the likely winner, the Democratic Party (DP), would have to form another coalition government, which would probably be just as divided and unstable as the one elected in 2004. Romanian foreign policy will continue to be close to that of the US and UK on security issues, and relations with Germany and its other EU partners may be subject to strains.

Romania--highlights: Demographic outlook

• Despite the recent slight rise in the birth rate, Romania's population will continue to decline slowly over the next five years. The entry of the final cohorts of the 1980s "baby boom" to the labour market will mean that the population of working age contracts at a slower rate over this period, which, together with a slight rise in participation rates, will allow the labour force to increase. The main uncertainties concern the level of future emigration to other EU member states and the number of recent migrants who are likely to return to Romania.

Romania--highlights: Business environment outlook

• Romania's business environment is set to improve during the Economist Intelligence Unit's 2007-11 forecast period, with cuts in social security contributions and some easing in the burden of business regulation, but political and macroeconomic uncertainties will limit progress. Large-scale investment in transport infrastructure will make a significant difference to business, but Romania's infrastructure will lag in terms of quality. The state will retain a strong presence in strategic sectors of the economy—in particular, the energy sector. The domestic demand-driven economic growth of recent years is unsustainable and a policy correction will be necessary at some point to ease concerns about external vulnerabilities. However, a tightening of fiscal, monetary and wage policies is not expected until after the 2008 parliamentary election, and then only because of considerable external pressure.

Romania--highlights: Economic outlook

• Economic growth will remain strong in 2007-08, but will slow in 2009-11 as Romania strives to bring down inflation in preparation for entry into the EU's exchange-rate mechanism (ERM2). The annual current-account deficit will average 12% of GDP. The leu may be adversely affected later in the forecast period by speculation about entry into ERM2 and eventual accession to European economic and monetary union (EMU), which we do not expect until 2013-14. The National Bank of Romania (NBR, the central bank) will pursue a cautious approach to euro adoption, but ERM2 entry poses risks for leu stability if doubts arise over Romania's ability to join EMU quickly.

Romania--highlights: Market opportunities

• Romania has the second-largest economy of the ten east European countries that joined the EU in May 2004 and January 2007. However, its level of GDP per head at purchasing power parity (PPP) lags behind most of the other post-communist states that have joined the EU. We project that Romania's real GDP growth will average 4.9% per year in 2007-11, significantly faster than the 2.3% forecast for the EU27, although slower than the EU's fastest-growing members. Consumer spending patterns in the more developed, western part of the country will be increasingly similar to those in western Europe, but the north-eastern regions of Romania will continue to lag behind.

Romania--highlights: Long-term outlook

• Romania has considerable scope to catch up with its more developed neighbours in the EU and, with an improving policy background and the adoption of modern information and communications technology (ICT), productivity growth will be strong. Labour productivity growth is forecast to be around 3.5% per year in the period after 2010. However, the poor demographic outlook means that this relatively strong productivity performance will be insufficient to prevent a significant slowdown in the rate of growth of real GDP per head, to 3.6% per year in 2011-30, compared with 5.4% per year in 2007-10.

Fact sheet