Romanian economy would register an advance of 7.3% this year, after a contraction of 3.9% in 2020, while in 2022 the economic growth will be of 4.8%, according to the latest Regional Economic Update of the World Bank (ECA Economic Update).

In comparison, in January 2021, the World Bank forecast that the Romanian economy will contract by 5% in 2020, but will register a recovery of 3.5% in 2021 and 4.1% in 2022. In June, the report on global economic outlook, the World Bank estimated that Romania will record an increase in GDP of 6% this year, by 2.5 percentage points above the January estimate, and next year will increase by 4.5%, by 0.4 percentage points above previous estimates, according to Agerpres.

The Romanian economy had a better evolution than expected, mentions the World Bank, contracting by 3.9% in 2020. A proactive but limited fiscal response, of 4.4% of GDP, supported companies to keep their employees and fed household income. GDP is expected to recover to 7.3% this year, supported by the advance of economic activity in the second half of 2021. Poverty is set to rise in the short term as the impact of the COVID-19 pandemic affects domestic sources of income and remittances, according to data released Tuesday by the World Bank.

Prior to the pandemic, Romania enjoyed a decade of economic growth, however, the crisis caused by COVID-19 affected economic activity and household incomes, exposing Romania’s structural problems. Historically, fiscal policy has been pro-cyclical. The budget deficit stood at 2.8% of GDP on average between 2011 and 2019, and the average growth of the economy was of 3.9% in that period. Economic growth has been strong despite weak fundamentals. High private consumption, partly driven by unsustainable wage growth, has led to inflationary pressures and a deepening current account deficit. The quality and quantity of the labor market and capital, as well as the slower dynamics of productivity have limited the potential for growth. Private investment has remained high, but a small financial sector limits the availability of long-term financing.

The government responded quickly to the crisis caused by the pandemic, providing fiscal incentives of 4.4% of GDP in 2020. It is one of the lowest levels in the EU, reflecting the limited fiscal space.