Romania: Back on track after turbulent lap

Romania’s economy expanded by a modest 0.8% y/y over the first three quarters, underscoring a persistent loss of momentum that positions 2025 as another year in which growth undershoots potential. The full-year projection of 1.3% remains intact; even assuming zero growth in 4Q25, headline full-year GDP should still edge higher, offering only a marginal lift to the annual average. Yet this arithmetic resilience masks an underlying weakness in domestic demand and leaves the 2026 outlook heavily dependent on late-2025 dynamics: a softer-than-expected fourth quarter would tilt risks decisively to the downside. Looking ahead, growth is expected to accelerate to 2.1% in 2026, driven primarily by investment, as Romania enters the final year of the RRP, catalyzing both public and private capital formation. Consumption should remain subdued for much of the year - its contribution broadly neutral as a tentative recovery emerges in the second half - while net exports are set to exert little directional impact amid muted domestic demand. However, Romania’s structural supply-side and competitiveness constraints persist, and these imbalances continue to cloud the medium-term trajectory, particularly through the trade channel.

Following a year defined by electoral turbulence - including five campaigns, the unexpected surge of the far-right, and a razor-thin presidential rerun - the eventual formation of a pro-European governing coalition, commanding roughly two-thirds of Parliament, created the political space for long-delayed fiscal consolidation. With markets and rating agencies losing patience and EU funds increasingly at risk, Romania faced a binary choice: a market-imposed correction or a controlled fiscal landing, the former carrying substantially higher macroeconomic costs. The government’s mid-summer fiscal package marked a decisive attempt to restore credibility by steering the deficit back toward the path agreed with the European Commission. While the measures are inherently inflationary and growth-negative, they successfully avoided a hard landing; importantly, the reliance on higher indirect taxes mitigates the drag relative to an equivalent adjustment via direct taxation. The approval of the package triggered a rally in Romanian sovereign debt, and further yield compression remains plausible - though contingent on consistent fiscal execution. Ultimately, the durability of this adjustment hinges on political stability, now the critical variable anchoring investor confidence.

The National Bank of Romania maintained its policy rate at 6.50% throughout the year, navigating a renewed inflationary flare-up in the second half of 2025 that stemmed largely from supply-side shocks. The removal of the electricity price cap in July and the indirect tax hikes in August pushed headline inflation to 9.8% y/y in October, with only a marginal retreat expected by year-end, while core inflation - at 8.1% y/y - has similarly plateaued. Against this backdrop, the probability of a near-term rate cut is exceedingly low. Our baseline anticipates the first reduction in 1H26, likely at the May meeting, coinciding with the release of the Inflation Report, as the central bank waits to assess the effects of lifting the remaining caps on natural gas and basic food markups at end-March. A cumulative 125bp of easing is expected through 2026, bringing the policy rate to 5.25% by year-end, contingent on a decisive disinflation as supply-side disturbances drop out of the statistical base. Indeed, headline and core inflation are projected to fall sharply to around 3.7% y/y by late-2026. While the expiration of price caps poses upside risks, the ongoing fiscal consolidation should temper aggregate demand and strengthen the disinflationary narrative, potentially even opening the door to an earlier rate cut, should confidence in inflation’s return to target improve sufficiently.

In sum, Romania’s economy enters 2026 like a long-distance runner cresting a difficult hill: slowed by fiscal weights, jolted by supply-side headwinds, and still catching its breath after a politically turbulent lap. Growth is subdued, inflation only now preparing to decelerate, and fiscal policy tightening the shoelaces that had long been left untied. Yet the path ahead is not without promise. With investment poised to take the lead and policy credibility gradually restored, the runner remains very much in the race - leaning forward, regaining rhythm, and hoping that the next stretch offers more downhill than up.

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