Both the European Commission (EC) and the European Bank for Reconstruction and Development (EBRD) have significantly improved their forecasts on Romania’s economic growth in 2015 and 2016, taking into account the boost coming from the fiscal relaxation measures the Romanian authorities have taken this year.

The European Commission expects Romania to post a 3.5% economic growth this year, which should accelerate to 4.1% in 2016, on higher domestic consumption determined by the fiscal relaxation, according to its autumn forecast released on Thursday, November 5. The EC’s spring forecast published in May indicated a 2.8% economic growth estimate for this year.

“Economic growth is forecast to accelerate this year and next and to remain strong in 2017, as fiscal stimulus spurs domestic demand at the price of a rising fiscal deficit. Inflation is expected to remain negative until mid-2016, but should recover rapidly in 2017. The labor market is projected to improve,” says the EC report.

However, the higher economic growth expected in the following years will come at a cost, according to the EC, which estimates that Romania’s structural deficit will increase from 1% in 2015 to 4% in 2017, preventing Romania from meeting the Medium-Term budgetary Objective (MTO).

The EBRD also sees positive developments in Romania due to the rise in wages and the lower financing costs, which have supported consumption and encouraged private investments. The financial institution, which is one of the biggest international investors in Romania, also sees a 3.5% growth this year followed by a 3.7% increase in 2016. Both estimates are 0.5 percentage points higher than in the spring forecast.

“In the remainder of 2015 and 2016, growth will continue to be supported by stronger domestic demand. Consumption will be boosted by higher disposable income, as a consequence of the recent VAT cut on food products from 24% to 9%, as well as introduced and planned public wage hikes. Private investments will continue to recover on the back of improved investor sentiments and previous decline in the cost of funding, while government investment is expected to rise in the second half of 2015 as the country absorbs more EU funds,” according to the EBRD report.

The International Monetary Fund (IMF) also improved its forecast for Romania recently.

editor@romania-insider.com