European Commission report: vulnerable elements of macro-financial growth and forecasts for 2008 and 2009

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The rise in the real GDP of Romania stood at six percent in 2007, down from the 7.9 percent in 2006, and the domestic demand, fuelled by the rise in employment and the rapid expansion of crediting, has remained the drive of Romania’s economic growth, reads a report of the European Commission, including the spring forecasts regarding the economies of the EU member states, recently released in Brussels.
 
The added value in constructions in Romania scored a record level of 34 percent in 2007. But the added value in agriculture decreased 17 percent in the same period. Moreover, the strong appreciation of the Romanian RON currency in the first half of 2007 led to increased negative contribution of the foreign balance of payments, the study reads.
 
The foreign crediting rate increased from 10.4 percent of GDP in 2006, to 13.2 percent of GDP in 2007.
 
Regarding the forecasts for 2008 and 2009, the EC report shows that economic growth in Romania will stand at 6.25 percent of GDP in 2008, and at five percent of GDP in 2009. In the second half of 2008, the rise in the prices of consumer goods and the toughening of crediting conditions, including the impact of the successive raises in the interest rates by the Central Bank are likely to lead to a drop in the consumption rate and in the investment growth rate, the effect is expected to persist in 2009. The falling domestic demand will lead to a slow down in the rise in imports and in foreign crediting, implicitly, with the latter expected to reach 15 percent of GDP in 2009, the study says.
 
In point of the labour market in Romania, despite the drop in employment in some fields, in the textile industry, in particular, the general employment rate increased 1.3 percent in 2007 and will rise one percent in 2008 and 0.75 percent in 2009. The creation of new jobs in the private sector will be supported by foreign investment and will lead to a reduction in the grey economy. A decline of the unemployment rate is expected in 2008 and 2009, up to little more than six percent.
 
The trend in the salary rate and the rate of exchange of the Romanian RON currency, accompanied by the trend in the offer and the increase in the prices of consumer goods at world level, fueled a rise in inflation, which reached 6.75 percent in Dec. 2007, higher than the forecasts of the Central Bank, of five percent.
 
In public finance, Romania’s budget deficit stood at 2.5 percent of GDP, compared with 2.2 percent of GDP in 2006, but below the budget target of 2.7 percent of GDP. The salaries and the social transfers higher than those forecast were made up for by capital expenses below the forecasts and by good performance in the revenues management.
 
In 2008, Romania’s budget deficit is expected to go up to 2.9 percent of GDP, and in 2009 to 3.7 percent of GDP, if the policies in the field remain unchanged. An important element of the rise of expenses is the almost doubling of the sums for pensions in this period. Part of the contributions for pensions went to pillar two, introduced in 2008, with the estimated budget costs standing at 0.2 percent of GDP in 2008, and 0.3 percent of GDP in 2009, the document also reads.
 
The rate of the social contribution will go down gradually by six percentage points, in 2008, the main impact of this measure is expected in 2009. These reforms will be partly financed by measures for the extension of the social contribution. The formation of the fixed gross capital will increase gradually, which will imply better absorption of the European funds. The revenues from direct taxes will remain the main element of the rise in revenues.
 
Despite recent measures of keeping under check the public expenses, these measures continue to represent an increased risk for the rise in the budget deficit. The other risk factors include lower incomes, including the negative impact of the said reforms on the social contributions, the continuation of modest performance in point of budget planning and implementation, and the pressure on public expenses, following the political cycle (the elections in 2008 and 2009), the report also reads.
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