Romania under the specter of recession: the three big risks that can destabilize the country

After years of being among Europe's fastest growing economies, Romania is now in a difficult situation, facing stagnation, high inflation and a huge budget deficit, which leaves little room for the traditional methods of stimulating the economy – tax cuts, lower interest rates and increased public spending.

Romania's economy went into recession. Archive photo

“On the contrary, amid the economic slowdown, the government has had to raise taxes to keep the deficit under control and maintain the country's sovereign rating above junk, while spending cut proposals create an unwanted political crisis“eToro analyst Bogdan Maioreanu states, arguing that the latest data on Romania's evolution from January 2026 show a global inflation of 9.6% compared to the same period last year, down slightly from 9.7% in December 2025, well above the euro area average of 1.7% and the highest rate in the European Union.

At the same time, preliminary figures point to two consecutive quarters of contraction in real GDP, with a sharp drop of 1.9% in the final quarter, placing the economy in a technical recession, even as, for 2025, projected annual growth remains modestly positive at around 0.6%. “This duality – high inflation combined with a shrinking economy – signals a 'hard landing' scenario, but also offers an important long-term opportunity – to rebalance the economy on a more solid footing and strengthen the country's finances, which have deteriorated since the start of the pandemic.”adds the analyst.

In terms of economic growth, the country's estimated GDP expansion of 0.6% in 2025 was among the weakest in the region, Maioreanu explains, recalling that, for example, Poland had economic growth of 3.6% in 2025, the strongest growth since 2022, registering a clear acceleration compared to 3.0% in 2024.

However, Romania is not the only country in the European Union that is in technical recession. “Ireland is the other country, but for entirely different reasons. Its gross domestic product fell 0.6% from the previous quarter in the three months to December 2025, after a 0.3% drop in the previous quarter, according to preliminary estimates. This marks the second consecutive period of economic contraction, driven largely by a downturn in the multinational-dominated manufacturing sector“, points out Maioreanu

A technical recession is commonly defined as two consecutive quarters of seasonally adjusted GDP decline from the previous quarter without implying a full structural slowdown. This is usually a strict and mechanical criterion, with deeper recessions usually confirmed by broader indicators such as employment, industrial production and real income growth. Recent episodes of technical recessions in the EU show that shallow and short-lived slowdowns can be compatible with a broader recovery, provided labor markets and confidence are maintained. In 2022-2023, the eurozone briefly entered a technical recession after the energy shock caused by the loss of cheap Russian gas, but unemployment remained close to record lows and the bloc avoided a deep recession thanks to strong demand for services and fiscal support.

Three key risks looming over Romania

Romania's situation partially reflects this dynamic – energy and regulated prices have been key drivers of inflation, and the current technical recession is associated with deliberate fiscal consolidation aimed at correcting a large budget deficit.

“However, Romania's current situation highlights three key risks. First, the relationship between inflation and economic growth is extremely tight. Although a lower interest rate would stimulate economic growth, the National Bank of Romania will most likely remain reluctant to cut rates aggressively until inflation is clearly on a downward trajectory.”

Second, the fiscal consolidation discourse – while well received by the rating agencies – implies reduced domestic demand and higher political risk premiums, at least in the short term. Third, the risk of external shocks, including energy price volatility and trade policy disruptions affecting EU export channels, could prolong the recessionary phase“, the analysis shows.

The European Commission predicts for Romania a real GDP growth of 1.1% in 2026, as the necessary fiscal consolidation is holding back private and public consumption, which is in turn affected by a sudden increase in inflation. “However, the economy will continue to grow thanks to a gradual recovery in private investment, an acceleration in spending financed by recovery and resilience plans (NRRP) and a considerable improvement in net exports. This makes the European funds from PNRR extremely important”, mentions the analyst.

According to the latest eToro Retail Investor Beat survey, at the end of last year, 70% of individual Romanian investors did not trust the Romanian economy. “The current technical recession is an example of how persistently high inflation and monetary and fiscal tightening have accelerated the slowdown as part of a necessary adjustment. But in the long run, this creates an important opportunity: this adjustment, if credible and well implemented, can lay the foundations for a more sustainable growth trajectory. To achieve this, politicians will have to cooperate in finding the best decisions that will serve the Romanian economy“, declared Maioreanu.

How can we overcome these difficult times?

An analysis carried out by the economist Claudiu Trandafir shows that the private sector and consumers have been feeling the entry into technical recession for many months.

“Accelerating public sector wage increases (+24% in 2024), supported by deficit and borrowing, fueled inflationary pressure and shifted costs into the real economy. The private sector had to absorb the shock through higher financing costs, increased taxes and a more cautious investment climate“, claims the economist.

According to him, the current context is not only economic, but also social: “The stagnation of real incomes and the erosion of purchasing power have created a fertile ground for radicalization and mistrust. The economy is no longer a technical background, but the direct explanation of the tensions in society. Until the summer of 2025, budget imbalances and high inflation kept the pressure on interest rates. The fiscal correction measures adopted afterwards brought a beginning of stabilization, but the difficult stage it's just the beginning: rebuilding confidence and relaunching investment”.

In the opinion of economist Claudiu Trandafir, a contracting economy puts pressure on monetary policy. “In such a context, key interest rate cuts towards the end of the year become likely, if the deficit adjustment continues. For the population, this means lower rates on loans linked to ROBOR or IRCC and more intense competition between banks for refinancing.

Refinancing loans taken out in peak interest years can become one of the most effective financial decisions in 2026, especially by migrating to fixed interest rates, which offer predictability in a still volatile environment”adds the economist.

In parallel, he states, public investments supported by European funds and large infrastructure projects remain the only consistent engine capable of reactivating the economy in 2026, provided rigorous implementation.

In an unstable macroeconomic climate, personal control of finances becomes essential. Auditing the family budget, eliminating unnecessary recurring expenses and optimizing existing credit can make the difference between financial pressure and stability.

“Inertia is the biggest hidden cost: an unanalyzed credit for years in a row can mean tens of thousands of lei paid extra.
Constant monitoring of the market and quick adaptation to new banking offers can become instruments of financial protection“, claims the economist.