The “rather unpopular fiscal measures” aimed at containing the public deficit have “some potential to dampen growth in 2024”, ING Bank assessed in its latest country update report.
However, the fiscal measures are estimated to facilitate fiscal consolidation with the deficit “possibly closer to 3.0% of GDP in 2025” (contingent on still relatively strong GDP growth), which “shouldn’t shake the market’s confidence much and/or the flow of EU funds”.
Despite its harsh GDP growth forecast, ING expects Romania’s authorities to bring the public deficit in line with the European Commission’s revised expectations of close to 3% of GDP in 2025, and the annual inflation rate to 4% y/y by the end of 2024.
ING revised its 2023 growth forecast from 2.5% to 1.5% based on a slightly disappointing first half of the year and limited prospects for an acceleration in the second part. The bank’s analysts also cut their forecast for 2024 from 3.7% to 2.8%.
The fiscal consolidation is expected to remain under control, with “controlled slippage” accepted by the European Commission.
Based on current information, ING estimates that in 2023 the budget deficit will be around 5.5% of GDP; it should decline toward the 4.0% mark in 2024 and possibly closer to 3.0% of GDP in 2025. “To the extent that the new targets will be agreed with the European Commission (and we believe they will be), it shouldn’t shake the market’s confidence much and/or the flow of EU funds,” the bank’s report reads.
As regards the monetary policy, ING sees the start of the easing cycle coming in the first quarter of next year, with a total of 150bp cuts by year-end.
Should the disinflation path disappoint, the probability of a higher-for-longer rates scenario increases materially, the bank notes. But it sees the 4% yearend inflation target for 2024 as “attainable” despite inflationary pressures posed by higher wages and the effects of the fiscal package, balanced by slowing aggregate demand and still-high interest rates.