In Central Europe, national accounts for the third quarter were published earlier this week. Hungary has exited recession after 4 quarters of negative growth. Poland continues to experience erratic growth with a rebound this time. However, other Central European countries saw a slowdown in economic activity. Romania is no exception. Q3 GDP growth came in at 0.4% quarter on quarter after 0.9% in Q2. Romania’s economy should overall show resilience this year while some countries such as Hungary and Czech Republic may post a negative GDP growth in 2023.
Romania’s economy is resisting well, that said, deficits related to budget and current account also known as twin deficits remain elevated. Last year, fiscal deficit reached 6.3% of GDP and could exceed 5% of GDP this year. Not much improvement is expected in the near term. Successive pension hikes, plus a new planned increase in 2024 alongside with sustained military expenditures since the beginning of the war in Ukraine will weigh on government’s budget.
Moreover, as from 31st December 2023, the escape clause related to EU’s Growth and Stability Pact will no longer be in place, meaning that European Union countries would need to comply to many commitments amongst which a budget deficit, not exceeding 3% of GDP. For Romania, this target is currently not realistic given numerous budget rigidities. Besides, it is unlikely that bold measures in terms of consolidation will be implemented next year with 4 key elections forthcoming in 2024.
Concerning the current account deficit, it was amongst the highest in the region at 9.1% of GDP in 2022. This year, the expected improvement will be marginal compared to its neighbours due to a pronounced trade deficit.
While deficits persist, their funding has nonetheless not been a major issue so far. The situation is also manageable in the short term. European Funds should fill part of the gap as in previous years. Financing needs for the budget should also be filled via bond markets.
Additionally, foreign direct investment flows remained strong despite geopolitical uncertainties. This should also be the case in the short term. Besides, liquidity and solvency indicators are strong and should contribute to cushion the effects of potential shocks.
