Romania – Restored fiscal credibility costs: Lower growth, higher inflation

GDP data for the first half of the year suggests that 2025 will mark yet another period with growth well below potential. Even so, the economy has demonstrated greater resilience than initially expected. Depending on how the second half unfolds, there remains a possibility that growth could surprise to the upside. A cautiously optimistic stance best captures Romania’s current outlook. While the resilience is notable, persistent macroeconomic imbalances and deep-seated structural challenges continue to magnify external risks, on top of ailing domestic demand, leaving the recovery on fragile ground.

At the same time, this resilience masks a delicate balancing act. Fiscal consolidation has become the central anchor for policy credibility. The government’s efforts to rein in deficits - through a combination of tax measures and expenditure restraint - have proven sufficient to preserve Romania’s investment-grade rating. This achievement is nontrivial, given the country’s elevated financing needs and reliance on foreign investors. However, the adjustment is not costless; slower public investment growth and restrained fiscal support could weigh on GDP dynamics, with forward-looking indicators pointing to softer momentum in the second half of the year.

Monetary policy, meanwhile, remains constrained by stubbornly high inflation. With little moderation from last year’s endpoint, price pressures remain elevated and above the National Bank of Romania’s target range. Structural drivers - such as wage growth in a still tight labor market, administered price adjustments, and first and possible second-round effects from fiscal measures - are causing inflation to reaccelerate into the second half of the year. As a result, the NBR has little room to cut policy rates without jeopardizing price stability credentials and de-anchoring inflation expectations. Hence, the central bank is likely to leave monetary policy tighter for longer than businesses and households might have hoped.

In sum, Romania’s macroeconomic equation is one of resilience under pressure. Fiscal discipline has restored investor confidence, but at the cost of jeopardizing near-term growth prospects. Inflation was losing momentum in the first half of the year, though it remained too high to allow monetary easing. The interplay between these forces suggests that Romania’s outlook will hinge on whether fiscal credibility can be maintained while still allowing space for investment and structural reforms to support medium-term growth.

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