Romania’s economy will contract by 0.5% this year and will recover modestly by only 1.5% in 2027, according to the forecast published by Capital Economics.

The combined growth of some 1% over the two years is less than the consensus forecast envisaging a modest 01% advance this year followed by more robust 2.2% growth in 2027.

"Romania's economy has been in recession since the second half of last year and is likely to stagnate for the rest of this year, as previous fiscal tightening measures and the decline in real household incomes continue to affect economic activity," Nicolas Crittenden, economist at the consulting firm, explains, cited by Curs de Guvernare.

Crittenden points out that Romania's GDP has contracted in each of the last three quarters, and in the first quarter of this year it fell by 1.5% at an annual rate. In addition, data on industrial production and retail trade indicate a further deterioration in economic activity in the second quarter.

He believes that the main factor behind the economic slowdown is the fiscal consolidation needed to reduce the budget deficit. "A large part of this weakness was driven by the fiscal tightening needed to bring the budget deficit back on a sustainable path," the economist points out.

The analyst estimates that the pressure on the population could decrease towards the end of the year if inflation slows down significantly, which could also allow for interest rate cuts in 2027.

However, Capital Economics warns that the economy will remain broadly stagnant in the coming period, as fiscal consolidation measures will continue.

"Romania is still on track to end the year with a budget deficit of around 6% of GDP, which will require new fiscal austerity measures to preserve the investment-grade rating and reassure investors," the analysis shows.

The report also warns of political risks, assessing that government instability and resistance to reforms may make it difficult to attract European funds before the deadlines expire at the end of August.

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iulian@romania-insider.com