Stability and predictability of global economy continue to face multiple challenges, amplified by record inflation, as well as by the economic and security implications of the war in Ukraine. We are probably going through the period with the highest density of crises in the last century, which will leave their mark, profoundly, on the developments

in the coming decades. These crises are, up to a point, heterogeneous, triggered by simultaneous causes and apparently independent, but their multiple implications intertwine and interrelate each other in the most diverse fields.

The spiral of crises was set in motion by the Covid-19 health crisis, followed by an economic lockdown that disrupted global supply chains. Several shocks have hit the world economy since - the energy crisis in Europe at the end of 2021, immediately followed by the war and the regional security crisis in early 2022, a context that currently culminates in worldwide inflation and tighter financial conditions.

Download Macroeconomic risks and vulnerabilities. Prospects for 2023

Exogenous macroeconomic risks must be assessed and managed with great caution, while also focusing on endogenous vulnerabilities, on structural imbalances that have been systematically accumulated over the years, such as, in the case of Romania, the deterioration in the current account balance.

The post-pandemic economic recovery has lost momentum globally, and the latest macroeconomic forecasts point to a gloomier outlook. The general economic context is fraught with uncertainty, affecting the accuracy of all forecasts and posing significant implications and risks for economic policy decisions.

The IMF and OECD have downgraded the global economic growth estimates for 2023, and the estimates for the US, the Eurozone and the UK are quite modest. Recessionary risks are expected, with many economies poised to contract.

Romania is not included under these recessionary scenarios, but certain contagion effects cannot be ruled out, since they are likely to slow down some categories of exports and the estimated economic growth for the coming years.

Persistent inflation is the main challenge to economic stability, substantially affecting the purchasing power of low-income social groups. Hence, well targeted, and appropriately dosed support measures are imperative to prevent further spirals of price increases.

Ironically, pandemic policies bear much of the responsibility for the inflation we are currently facing. Both monetary and fiscal policies created additional demand, which gradually started to emerge as the sanitary restrictions were lifted, and prices began an upward trend. In addition, lingering production backlogs and supply chain disruptions have also intensified supply-side price increases.

A distinctive factor at regional level is the inflationary spiral of the war and the energy crisis. War and inflation have always gone hand in hand, this time through the channel of energy security, which has become an essential factor, but also an instrument of pressure in the current geostrategic equation.

Monetary policies of the major central banks were thrown into the anti-crisis battle without hesitation, in the effort to safeguard the global economy from the expected damage of the pandemic.  Since the health crisis started, central banks have responded by unprecedented cuts in policy interest rates and by rapidly increasing the money supply to the economy.

Given the painful consequences of price increases, in the second half of 2022, monetary policies indicated a decisive, and perhaps even overdue, change in course. Therefore, monetary policy is, rightly so turning pro-cyclical.   This will inevitably slow down growth, especially in its less sustainable areas - which however accentuates recessionary risks.

The massive budgetary effort that governments have undertaken during the pandemic, both in terms of healthcare and economic support policies, has led to significant budget deficits in most EU states, in the US and the UK, deficits that have not yet moderated sufficiently.

Although the stimulus packages were expected to be phased out in 2021, many Member States decided to continue to support public spending with a sizeable permanent component. As a result, budget deficits declined less than the economic recovery would have predicted, and the primary structural budget balance continued to deteriorate.

Fiscal consolidation continues to be increasingly difficult, given that public budgets took over, at least temporarily, a large part of the energy crunch burden. .

On the other hand, due to broad-based inflation, public finances tend to consolidate easier in nominal terms, but not necessarily from a structural point of view. Fiscal obstacles will emerge as inflation and its nominal implications will enter a more consistent downward path, as projected for 2023.

Public debts heavily accumulated in recent years are another direct consequence of the pandemic policies. The levels of these debts will become increasingly rigid in terms of access to financing and the capacity of public finances to cope with new shocks.

The share of public debt in GDP has consistently increased in most EU states, but also in the USA or the UK. Further, the expansionary budgetary policies and the deteriorating financing conditions pose the risk that the coming years will be shadowed by the return of the sovereign debt crisis.

Romania's economy registered a significant growth in the post-pandemic period. Statistical data indicate a robust economic growth of 5 percent in the first 9 months of 2022, despite the fragile global economic context and the regional spillovers of the Russian-Ukrainian war.

In the first half of 2022, the economic growth was still driven by consumption, to the detriment of investments. Even if investment redounded in the third quarter of last year, increasing by 13 percent YoY, economic growth is still backed by the increase of consumption, which deepens the external imbalances to record values, contrary to the developments in the region.

The investment allocation of 7.2 percent of GDP and the investment priorities in the 2023 budget, are positive steps for shifting the contribution to economic growth towards investment - based in particular on European funds.

External imbalances represent the most serious warning for Romania's economic sustainability and competitiveness. The perpetuated twin deficits reflect the entrenched structural problems, as Romania entered and had to manage the health crisis having the weakest budgetary position in EU, and under the Excessive Deficit Procedure.

The current account deficit exceeded 20 billion euros in the first 9 months of 2022, and the outlook remains concerning, with the downside risk of reaching a current account deficit of 9 percent of GDP by the end of the year, given the excess demand and the strong deterioration of the trade balance.

On one hand, the steady deterioration of the current account deficit reflects the significant decline in the government’s savings – investment balance. This dominance of the public sector contrasts the situation before the financial crisis of 2008, when the widening of the current account was mainly driven by the private sector expansion, in some ways unsustainable, on the backdrop of a strongly positive output-gap.

The trade balance is, on the other hand, a strong factor in the deterioration of the current account situation, and the data for the first 9 months of this year still paint a worrying picture. The trade deficit reached 25 billion Euros, almost 50 percent higher relative to the similar period in 2021, partially determined by import prices stronger than export prices.

The products having the largest trade deficits were chemicals, followed by mineral fuels and lubricants. The strong dependence on imports for certain categories of goods proves the clear need for coherent strategies to raise domestic production and exports.

The budget situation for the first 11 months of last year printed a deficit of 4.2 percent of GDP, indicating that the cash target of 5.7 percent of GDP could broadly be reached.

However, in 2023 and beyond, increased efforts are needed to sustainably increase the share of tax revenues to GDP, and further reduction in the budget deficit is supported also by the revenue side.

Tax revenues increased by almost 23 percent in nominal terms, but the main ally behind this performance was inflation. This will not repeat in 2023, so the focus of the tax administration needs to be shifted from quantitative to qualitative performance, to enhanced tax collection efficiency.

Investment from European funds is crucial for the economy to regain its strength, resilience, and competitiveness. However, recent data indicate the need to step up administrative efforts to boost EU funds investment, given the suboptimal absorption to date.

On the other hand, foreign direct investments increased strongly, about 15 percent in the first 9 months of 2022, showing that business environment in Romania is still attractive to foreign investors.

In the current economic and security context, and considering the underlying risks and vulnerabilities, caution and responsibility in conducting public finances are imperative, while reforms and investment from EU funds must be sustained and accelerated.

In this sense, the 2023 budget must be a robust, credible budget, supporting the commitment to fiscal consolidation - by sustainably reducing the budget deficit towards the assumed targets. The budget should back the implementation of the RRP and the full absorption of European funds, while also protecting the most vulnerable social categories against inflation, but also against the energy crisis and its risks during the winter period.

Post-Scriptum inflation: regarding the measures against inflation that are now warranted, some radical opinions have also circulated, that inflation must be quickly annihilated by decisive measures. But we must acknowledge that inflation does not appear and disappear like turning on and off a light bulb in the house, by simply flipping a switch.

In an economy, these processes take time, and if you now want to act the switch - that is, to explosively increase interest rates and suddenly and drastically cut the budget deficit, you may find that the house remains in the dark, that is, the economy remains without fuel, companies run out of credit or working capital, jobs disappear, many people will no longer be able to pay their bank instalments, etc.

Therefore, we must understand that the process of disinflation, of reducing the intensity of inflation, needs a time for certain adjustments to be accommodated in the economy, including the increase in interest rates. To this end, and given the monetary policy needs to be consistent with its defining goal of inflation targeting, which confers credibility and confidence, it can be anticipated that 2023 will be the year of disinflation.