Potholes appear in Romania’s stellar economic growth path

Potholes appear in Romania's stellar economic growth path

Bucharest (AFP) – Coming top of the class doesn’t always mean escaping a telling off: Romania may have posted Europe’s strongest growth figures on Wednesday, but analysts are worried the star pupil is heading for a fall.

The 7 percent surge in growth last year should, on the face of it, be good news for Romania, which had among the lowest average income figures when it joined the European Union in 2007.

But the jump in household consumption that drove the growth was due primarily to tax cuts and wage hikes, rather than investment into infrastructure needed for long-term expansion.

“Economic growth is not always synonymous with development”, said Cristian Paun, associate professor of international finance at the Bucharest University of Economic Sciences.

“The Romanian economy has grown by getting itself into debt, without building a single kilometre of new motorways,” he noted.

The European Commission has also sounded the alarm bell.

Its latest report says that in 2017 “the main driver of growth was private consumption, supported by indirect tax cuts and wage hikes”.

Public investment however, “fell sharply for the second consecutive year”.

The nation of 20 million is in dire need of putting long-term money into transport to support greater trade with its EU partners.

The country has barely 550 km (340 miles) of motorway and the rail network is deteriorating, with trains running at an average speed of just 44 km/h, as opposed to 78 km/h in 1990.

“Not a penny was spent in 2017 to buy rolling stock while only a short distance of rails were modernised,” said Viorel Istrate, a leader of a railway workers’ union.

“The situation is even more dramatic in 2018, with the budgets cut further,” he said.

As for the road network, Social Democrat Prime Minister Viorica Dancila has pledged to build 350 kilometres of new motorways by 2020.

But Doina and her husband Matei, both keen hikers frustrated by the huge traffic jams they encounter on the road linking Bucharest with the holiday resorts of the Carpathian Mountains, don’t believe the latest promises.

“It’s been ten years since they promised 50 kilometres between (the central towns of) Comarnic and Brasov and it’s never got off the ground,” said Doina, a 39-year-old doctor.

– ‘Risk of overheating’ –

And then there is, as the European Bank for Reconstruction and Development puts it, “a risk of overheating, with inflation picking up in 2017 and even more expected in 2018”.

Inflation hit 4.3 percent in January, its highest level in four years.

Retired engineer Amalia Ionescu said prices have shot up at the market: eggs by 43 percent, butter by 22 percent and fruit by 11 percent.

Meanwhile employers complain that the wage hikes that have stimulated the boom have not been matched by an increase in productivity, with a consequent fall in their competitiveness.

“The government was wrong to think that local production would keep pace with demand,” said Paun.

Instead Romanians have consumed more imports, leading to the trade deficit jumping by a third in 2017 to more than 13 billion euros ($16 billion).

Economist Liam Carson at London-based Capital Economics said most of central and eastern Europe is expected to see a gradual slowing of growth.

“However, the Romanian economy is likely to experience a much sharper slowdown,” he said in a note to clients.

Capital Economics expects Romania’s growth rate to fall to around 3.5 percent in 2018.

“That’s weaker than most analysts currently anticipate,” he noted.

Romanians haven’t forgotten how the 2007-08 boom ended: a deep recession where many had their wages cut by a quarter, with the country forced to go to the IMF and the EU for help.

Paun said Romania’s repeated cycles of boom and bust show that its integration into the EU has failed to bring durable benefits for its citizens.

“If we look at economic growth over the past 25 years we see a lot of volatility: periods of sustained expansion followed by equally spectacular slumps,” he said.