Romania Country Report

External balance risks remain a key concern for the macroeconomic stability, as the hopes for structural improvements in the foreign trade have weakened after the release of the latest statistical reports.
Another hot topic is the fiscal policy, as the government runs pro-cyclical expenditures amid risks of economic slowdown. The structural budget deficit was higher than 3% of GDP last year and may not decrease in the medium run. The European Commission and IMF warn of fiscal risks as well, viewing large expenditures for financing the planned pension hike next year.
The third focal point is the inflation dynamics, as the annualised consumer price index is expected to rise 9.5% y/y in July after the energy regulator approved natural gas and electricity price hikes. The price shocks in the industrial sector are even bigger that is also reflected into the more general indicator for calculating the economic growth in real terms. The GDP deflator is reported at 16.4% y/y in Q1 and the PPI inflation accelerated to 16.8% y/y in May. The central bank consequently increased the monetary policy rate by 25bps to 10% in a bid to curb domestic demand. Central bank governor Isarescu reiterated calls for more cautious fiscal and wage policy and repeatedly urged the government to accommodate more radical fiscal mechanisms against inflation.