iBanFirst forecast: Romanian economy will grow by 2.7 percent, inflation will hover around 5 percent in 2024

The Romanian economy will grow by 2.7 percent driven by public investment and private consumption. Inflation will hover around 5 percent and the RON/EUR cross will remain relatively stable. These are the main economic and exchange rate forecasts for 2024 by iBanFirst, a leading provider of foreign exchange and international payment services for businesses.

In 2024, Romania’s economy is expected to continue its growth trend, but at a more moderate pace. Though economic growth will be under the potential, like in the rest of Europe, iBanFirst forecasts that GDP growth will reach 2.7 percent in 2024 after 2.0  percent last year. This will be mostly driven by public investment and private consumption. In the current macroeconomic environment, this is an honorable performance.

`Looking ahead, we remain optimistic about the Romanian economy. We think GDP growth could stabilize around 4 percent per year on average in the coming decade. This is lower than in the past. But this is explained by a lower global growth momentum. Most of the economies will likely run under their potential in 2024 and beyond`, says Alin Latu, Country Manager iBanFirst Romania.

The elevated deficit is iBanFirst’s biggest worry in the long run. Romania’s GDP budget deficit is at 5.6 percent. Czechia, with an economy similar in size to Romania, is running a ~3 percent GDP budget deficit. Until now, foreign investors haven’t paid much attention to this issue. But this is a ticking bomb for the economy and the next government should put all the efforts to lower it significantly.

The fight against inflation is far from over

The January CPI figures were a hard reminder how difficult and bumpy the fight against inflation is. The headline jumped to 7.4 percent due to broad-based price pressures. iBanFirst analysts especially worry about the strong services inflation, its potential ripple effects on wages and likely fiscal easing ahead of the elections. They believe inflation will hover around 5 percent at the end of this year and will only get back to the central bank’s target of 4 percent in 2026. This clearly reduces the scope of rate cuts, at least for this year.

Should the economy show worrying signs of weakness, analysts think the central bank will prefer using the levy of the interbank liquidity rather than cutting rates. Right now, the interbank liquidity is hovering close to record-breaking which basically results in a policy easing outcome with little negative side effects on the inflation trajectory.

iBanFirst anticipates that the easing cycle will start later and will be less aggressive than expected. Analysts aim for a first cut in May with a terminal rate at 6 percent this year against 7  percent now.

Evolution of the RON against the EUR and USD

FX-wise, iBanFirst analysts are aligned with the consensus for the EUR/RON, forecasting the cross will evolve in a tight range for most of the year, between 4.99 and 5.02. This is the year of stability.

The same cannot be said for the USD/RON. The money market expects the USD will start a bearish cycle from Q2 onwards on the back of Fed easing, low US productivity and dedollarisation. What is happening in the FX market does not fit the narrative. Since January, investors have unwound Nov/Dec’s pricing of early rate cuts across the world, reversing the fall in the dollar. The greenback is well-placed to perform well this year.

Geopolitics is a key driver behind the strength of the dollar. But there is more. The US economy is very resilient and contrary to what the bears were expecting, the US productivity is back and strong. In Q4 2023, productivity was up 3.2 percent while in the EU it is still negative. Therefore, iBanFirst expects the rise of the USD/RON to last for most of the year. The US presidential election will induce more volatility than usual, but they doubt this will reverse the dollar gains. YDT, the USD/RON is up 2.60 percent at 4.60 and the expected price target is 4.80.