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Editorial - Europe begins slow return to normality

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By Cristian Cojanu
As the continent slowly emerges from long COVID-19 lockdown, the European Commission's Spring 2020 European Economic Forecast paints a sobering picture of economic tough times ahead.
"In the current quarter, economic output in the EU is set to be almost 16% lower than in the last quarter of 2019. Although activity is expected to pick up again with the just-initiated, gradual easing of containment measures, the contraction in EU GDP this year is expected to be 7½%, far deeper than during the financial crisis in 2009," Maarten Wervey, Director General Economic and Financial Affairs, wrote in the foreword to the report.
The report expects the EU's GDP to rebound in 2021 by 6%. "The COVID-19 crisis is a symmetric shock hurting all Members States. Their strong economic interconnectedness is magnifying the aggregate demand and supply shocks. While the recovery looks set to be incomplete in almost all countries, the impact of the crisis and the way Member States will emerge from it is set to be uneven."
For Romania, the report projects a steep real GDP decline in 2020, after several years of solid growth. "Private consumption, the main driver of growth in recent years, is expected to be impacted severely by the lockdown measures. Uncertainty is expected to hurt investment decisions, while net exports are projected to contribute positively to growth. Unemployment is set to increase while inflation is forecast to ease due to the drop in oil prices. In 2021, real GDP is projected to rebound, though not to pre-crisis levels. The budget deficit is projected to increase significantly as the fiscal measures required to fight the COVID-19 crisis come on top of past fiscal slippages."
Thus, the country's real GDP is expected to contract by 6% this year and rebound by over 4% in 2021. Private consumption is seen increasing gradually and contributing positively to growth next year.
The report also indicates that the general government deficit is forecast to exceed 9% of GDP in 2020. "The preexisting expansionary trend largely driven by pension increases is set to be reinforced by the impact of the COVID-19 crisis." Moreover, the debt-to-GDP ratio is forecast to rise from 35.2% in 2019 to over 54% in 2022.
Identifying similar economic threats, Moody's and Fitch changed their respective outlooks on Romania's ratings to negative from stable. "The revision of the Outlook reflects the substantial worsening in Romania´s public finances expected in the short-term as the outbreak and spread of the COVID-19 pandemic aggravates an already weak fiscal position," a Fitch Ratings press release pointed out, emphasizing that deficit was forecast to widen to 8% of GDP in 2020 from 4.6% in 2019. Fitch expects the deficit to narrow to 4.2% of GDP in 2021, driven in part by a recovery in economic activity.
 In turn, Moody's noted that "this year's economic recession in the context of the coronavirus outbreak weighs on Romania's fiscal outlook," forecasting a 5% GDP contraction. In addition, Moody's expects the general-government fiscal deficit to reach 7.7% of GDP this year and 6.2% of GDP in 2021.
While the full impact of the coronavirus pandemic may still be difficult to predict, Business Arena is going to continue to keep an eye on all the issues affecting the business community, reflecting its views, hopes and challenges.

The editorial is also available in our print edition of Business Arena.

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