Romania faces slow economic recovery as fiscal adjustment enters tougher phase

Romania’s economy is expected to contract by 0.5% in 2026 before returning to modest growth over the next two years, according to ING’s latest Global Outlook 2027 report. The bank forecasts GDP growth of 2.2% in 2027 and 2.4% in 2028, as inflation gradually eases and domestic demand recovers. The outlook comes as Finance Minister Alexandru Nazare warns that the remaining phase of Romania’s fiscal consolidation programme will be more difficult, with the government seeking to reduce the budget deficit without undermining economic growth, according to Business Review.

The projections, included in ING’s November global economic outlook, reaffirm the bank’s earlier assessment that Romania is heading towards its first annual economic contraction since 2020. ING expects activity to recover gradually, with quarterly annualised growth forecast at 1.5% in the final quarter of 2026, 1.8% in the first quarter of 2027, and 2.5% in the second quarter.

Romania’s economy has struggled with weak consumption, elevated inflation, and fiscal adjustment measures. In a previous analysis published in September, ING noted that investment had become the country’s principal source of economic growth, while household spending and industrial activity remained under pressure.

According to the bank, gross fixed capital formation increased by 16.5% year-on-year in the second quarter of 2026, contributing 4.1 percentage points to GDP growth. Household consumption, meanwhile, declined by 3.1% in volume terms, subtracting 1.9 percentage points from growth.

The figures underline Romania’s dependence on investment to sustain economic activity, particularly as fiscal consolidation continues to weigh on domestic demand.

Inflation expected to ease, although energy prices remain a risk

ING forecasts average annual inflation in Romania to decline from 8.5% in 2026 to 4.7% in 2027 and 3.5% in 2028. The bank expects inflation to reach 6.6% in the final quarter of this year, before falling to 6% in the first quarter of 2027 and 5% in the second.

However, the outlook remains sensitive to energy prices and geopolitical developments. Across Central and Eastern Europe, ING expects economic activity to remain relatively resilient despite the latest energy price shock, supported by domestic demand and labour market conditions.

Higher energy costs are expected to interrupt the region’s disinflation process temporarily, with inflationary pressures potentially peaking in the first quarter of 2027 before easing.

The bank expects Romania and Hungary to remain on a path towards lower interest rates, although the timing of monetary easing will depend on energy prices, currency stability, and geopolitical developments. Persistent inflation could delay rate cuts, particularly in Romania, where borrowing costs remain among the highest in the region.

At the global level, ING forecasts economic growth of 2.3% in the United States and 1.2% in the eurozone in 2027. European growth is expected to receive support from German fiscal stimulus, although the region continues to face challenges related to energy costs, consumption, and investment.

Finance minister warns of a more difficult fiscal adjustment

The ING outlook coincides with fresh warnings from Finance Minister Alexandru Nazare, who told the Romanian Senate on Wednesday that the country was only halfway through its fiscal consolidation programme. He said the remaining adjustment would be more difficult because public tolerance for additional deficit-reduction measures was declining.

The minister made the remarks during a parliamentary debate on a motion against him, which was subsequently rejected by the Senate. A day earlier, Nazare had stressed the importance of fiscal discipline and more selective public investment as the government prepares the 2027 budget.

Speaking at an economic event on Tuesday, he said Romania needed to improve spending efficiency and prioritise investments capable of supporting long-term economic growth. He also acknowledged the weakness of the country’s economic performance, citing a government projection of a 0.4% contraction in 2026. Nazare said the final outcome would depend partly on agricultural and construction activity during the latter part of the year.

The minister reiterated the government’s intention to avoid further tax increases in 2027, while emphasising that credible spending reductions would be necessary to achieve that objective.

He also confirmed plans to eliminate the minimum turnover tax (IMCA) from 2027, describing the measure as part of efforts to improve the investment environment.

Nazare said that maintaining Romania’s investment-grade credit rating was a central consideration in preparing the budget, warning that a downgrade would have serious consequences for financing costs and the wider economy.

Investment remains central to Romania’s recovery

ING’s analysis identifies investment as the principal factor supporting Romania’s economy during the current downturn. However, the bank has also warned that the transition from recovery-plan financing to other European funding instruments could affect public investment momentum.

In its September assessment, ING had highlighted the importance of cohesion funding and the EU’s SAFE defence financing programme in supporting investment, alongside the need for stronger private-sector activity.

The bank’s latest forecasts suggest that Romania will return to positive growth in 2027, although the recovery is expected to remain moderate. At the same time, the government’s commitment to further fiscal consolidation leaves policymakers facing the challenge of reducing public borrowing while protecting the investments needed to support economic activity.

Over the past five years, Romania’s economy has undergone one of the most complex stress tests in its post-communist history. Spanning the tail end of the COVID-19 recovery, the outbreak of war on its northern border, an acute European energy and inflationary shock, and a subsequent cycle of fiscal consolidation, Bucharest has demonstrated notable macroeconomic resilience—emerging as one of the fastest-growing economies in Central and Eastern Europe, even as deep structural imbalances demand urgent policy discipline.

Driven by robust private consumption, accelerating European Union fund absorption, and nearshoring trends in manufacturing and IT, Romania’s nominal gross domestic product (GDP) expanded significantly between 2021 and 2026, steadily narrowing the convergence gap with the European Union average. Yet beneath the headline growth figures lies a nuanced story of shifting growth engines, elevated borrowing costs, and a persistent battle to rein in twin deficits.

Post-Pandemic Rebound and the War-Driven Shock (2021–2022)

Following the pandemic-induced contraction of 2020, Romania mounted a swift rebound in 2021, posting real GDP growth of 5.7%. Accommodative monetary policy, pent-up consumer demand, and the initial rollout of European recovery instruments propelled activity across retail, construction, and services.

However, Russia’s full-scale invasion of Ukraine in February 2022 fundamentally altered the regional economic calculus. Proximity to the conflict triggered acute uncertainty, supply-chain bottlenecks, and a surge in global energy and food prices. Despite these headwinds, Romania’s economy defied widespread recessionary forecasts, expanding by 4.1% in 2022. Resilient domestic demand, rapid rerouting of regional logistics through the Black Sea port of Constanța, and strong corporate investment cushioned the external shock.

The primary casualty of this period was price stability. Annual consumer price inflation surged to a two-decade peak of over 16% in late 2022, prompting the National Bank of Romania (BNR) to execute an aggressive monetary tightening cycle, lifting its benchmark policy rate to 7.00% to anchor inflation expectations and safeguard the stability of the Romanian leu.

Disinflation, EU Funds, and the Shift to Investment-Led Growth (2023–2024)

As energy markets stabilized and tighter financial conditions took hold, Romania entered a phase of gradual cooling and structural rebalancing during 2023 and 2024. Real GDP growth moderated to 2.4% in 2023 before settling near 1.0%–1.5% in 2024, reflecting weaker industrial demand across key Eurozone trading partners—most notably Germany—and subdued agricultural output caused by severe droughts.

Crucially, however, the composition of growth shifted decisively toward capital formation. Fueled by the National Recovery and Resilience Plan (PNRR) and multiannual EU cohesion funds, public infrastructure investment reached historic highs. Large-scale highway construction, railway modernization, energy grid upgrades, and hospital rehabilitation projects became primary economic stabilizers, offsetting sluggish European industrial orders.

Concurrently, inflation followed a steady downward trajectory, dropping into single digits in 2023 and moderating toward 5% by the end of 2024, allowing the central bank to initiate cautious rate cuts while maintaining a watchful eye on rapid wage growth.

Navigating Fiscal Consolidation and Schengen Integration (2025–2026)

Entering 2025 and 2026, Romania’s economic narrative became defined by two competing forces: historic institutional milestones on one hand, and unavoidable fiscal tightening on the other.

Full integration into the European Union’s Schengen area—first via air and sea borders in 2024, followed by full land-border accession—eliminated costly transit bottlenecks for Romanian exporters, logistics operators, and manufacturers, lowering trade friction and strengthening Romania’s appeal as a regional nearshoring hub.

At the same time, years of generous public-sector wage increases, pension recalculations, and crisis-era subsidies left Romania under the EU’s Excessive Deficit Procedure, with the general government deficit surpassing 8% of GDP in 2024. Throughout 2025 and 2026, authorities were compelled to implement multi-year fiscal consolidation packages—combining tax base broadening, spending restraint, and digitalized tax collection—to preserve investor confidence and protect Romania’s investment-grade sovereign credit rating.

Macroeconomic Snapshot: Romania (2021–2026)

Sectoral Engines and Structural Challenges Ahead

Across this five-year arc, Romania’s sectoral landscape has matured markedly. Information technology and business services continued to expand their share of national value added, even as the removal of sector-specific tax exemptions tested margins. Automotive manufacturing, renewable energy installations, and defense-related industrial partnerships attracted substantial foreign direct investment, positioning Romania as a critical strategic anchor on NATO’s eastern flank.

Furthermore, Romania’s convergence in living standards progressed rapidly: in terms of GDP per capita adjusted for purchasing power parity (PPP), Romania surpassed several regional peers—including Hungary and Greece—reaching roughly 80% of the EU average.

Nevertheless, sustaining this momentum into the second half of the decade hinges on resolving three persistent vulnerabilities:

1. Twin Deficits: Narrowing both the fiscal shortfall and a structural current account deficit hovering near 7–8% of GDP without choking off private investment.

2. Demographic Headwinds: Countering workforce shortages through vocational training, automation, and targeted labor migration.

3. PNRR Execution: Maximizing the absorption of remaining EU grant and loan tranches before the 2026 deadline through timely administrative and judicial reforms.

Having weathered a pandemic, a regional war, and an inflationary surge without derailing its upward convergence trajectory, Romania enters its next economic chapter with stronger infrastructure, deeper European integration, and an unmistakable mandate for fiscal discipline.