Having fastest-growing EU economy isn't making this country's people richer

Representative image
The benefits of living in the Europe Union's fastest-growing economy may not endure for Romanians.

Despite gross domestic product rocketing as the government splurges on higher public-sector salaries and cuts taxes, the Balkan country's wealth – calculated as citizens' net assets as a share of disposable income – remains about the same as it was five years ago.

For some, the gains are funding day-to-day essentials including food and clothes – understandable in a country whose living conditions are among the EU's worst; others are splashing out on holidays and televisions. Fewer Romanians are investing their windfall in long-term assets such as apartments.

Florian Libocor, an economist at BRD-Groupe Societe Generale SA in Bucharest, says people are behaving like the government's largess will continue indefinitely. That's not likely to be possible as the European Commission warns on the sustainability of the Budget deficit.

"Citizens haven't accumulated wealth in recent years – they increased indebtedness based on positive expectations," Libocor said by phone. "Many people haven't even waited to see if the promises materialise and they consumed more but also accumulated more debt. At one point, a correction is inevitable."

The EU predicts Romania's economy will expand 4.4 per cent in 2018 after eclipsing growth elsewhere in bloc last year. But the first signs of a squeeze on its citizens are appearing.

Inflation reached a 4 1/2-year high in December and the central bank has already begun raising interest rates, which had been stuck at a record low since 2015. Money markets have been ahead of the curve, pushing up monthly mortgage repayments for some Romanians by about 15 per cent in the past three months.

It may already be too late to set aside enough cash to cushion the blow.  

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel