Romanian economy hit a minimum point in Q2 2025

by ioan.cavaleru
  • Romanian economy hit a minimum point in Q2 2025, in the context
    of unprecedented domestic political tensions, with negative impact
    on investments. FDIs contracted in May b y the most severe pace
    since Mar 2020, according t o the NBR data, represented in the first
    chart on the right side. The fiscal consolidation process(which started
    in Q1, when the budget deficit/GDP ratio declined t o 7.5%, the lowest
    since Q4 2023, according t o Eurostat) and the signaled structural
    reforms in the public sector would contribute t o the improvement of
    the risk perception, the increase o f the overall productivity, and the
    consolidation o f the financial stability i n the coming quarters. I n July
    S&P affirmed the sovereign rating a t BBB-, negative outlook, a s the
    measures implemented by the New Government are forecasted t o
    adjust the budget deficit/GDP ratio t o 7.7% in 2025 and 6.4% in 2026.
  • Growth forecasts upwardly revised in 2026 and 2027, on the back
    o f better outlook for investments. According t o our revised forecasts
    the GDP would increase by annual rates o f of 1.1% i n 2025 (vs. 1.5%),
    3.6% in 2026 (vs. 3.3%) and 3.5% i n 2027 (vs. 3.4%). We increased the
    forecasts for the annual pace of the gross fixed capital formation, a s
    the fiscal consolidation measures (recently announced) would have a
    positive impact o n the investment climate. The gross fixed capital
    formation would increase by annual rates o f 5.5% in 2025 (vs. 5.3%),
    6.3% in 2026 (vs. 5.7%), and 6.3% i n 2027 (vs. 4.8%). O n the other
    hand, we cut the forecasts for private consumption (also given the
    increase of the VAT from 1st Aug), t o Y/Y paces of 2.0% i n 2025 (vs.
    2.2%), 3.0% in 2026 (vs. 3.2%), and 2.8% in 2027 (vs. 2.9%).
  • Inflation and Monetary Policy. The consumer prices (HICP) rose by
    5.8% Y/Y in Jun, the highest level since Apr 2024, being noticed the
    increase of the food prices by 7.7%. Core inflation inched up t o 5.6%
    Y/Y in Jun, the maximum since Jan, according t o Eurostat. At the fifth
    monetary policy meeting of 2025 NBR kept the policy rate and the
    MRRs and expressed the worries regarding the inflationary pressures
    in the short-run, while considering that the domestic supply-side
    shocks would have a transitory impact, with low risks for mid-run
    inflation expectations. I n our revised scenario the consumer prices
    (HICP) would increase b y average Y/Y rates of 5.6% in 2025 (vs. 5.0%),
    4.8% in 2026 (vs. 3.9%), and 3.4% i n 2027 (vs. 3.3%). We continue t o
    forecast the resumption of the interest rate cutting cycle in 2025.
  • Banking Sector. The annual rate of non-government loans
    decelerated from 9.7% in May t o 9.1% i n Jun, due t o the slowing￾down of the NFC component from 9.0% in May t o 8.1% in Jun (the
    household segment rose by 10%, the highest pace since Jun 2018). I n
    our view, the non-government loans would increase by 8.7% in 2025
    (vs. 8.6%), 7.6% in 2026 (vs. 7.7%) and 7.5% i n 2027 (vs. 7.7%). For
    the non-government deposits the new forecasts indicate annual
    growth rates of 7.6% in 2025 (vs. 8.0%), 8.5% i n 2026 (vs. 8.7%), and
    8.8% in 2027. W e point out the increase o f the NPL ratio for the third
    month in a row i n May, t o 2.66%, a n evolution determined by the
    negative output gap and the upward trend of the real interest rates.
  • The balance o f risks continues neutral. Among the risk factors for
    the economy in the short-run we mention the international macro￾financial climate and the pace o f the implementation of the structural
    reforms in the context of the tensions in the Government coalition