In recent days there have been intense disputes on the “technical recession”, and various causal responsibilities have been put forward. It remains to be clarified how serious it is that it is called a “recession” and how acute its “technical” nature is. And the concern is also to understand when the current economic decline began.
The textbook definition of technical recession means two consecutive quarters of economic decline, measured by GDP dynamics compared to the previous quarter. As such, the GDP results in the third and fourth quarters of 2025, namely -0.1% and -1.9%, respectively, are a “classic” case of technical recession.
In this regard, the difference between the chain of two quarters with negative dynamics and the overall economic recession is significant, as a deep and lasting manifestation in the annual dynamics of national economies. However, there are also some opinions that the technical recession is, in fact, the antechamber of economic recession. However, numerous empirical evidence invalidates such assumptions.
Romania’s case is not a singular in the European Union. Ten other Member States (Denmark, Germany, Estonia, Latvia, Luxembourg, the Netherlands, Austria, Hungary and, more recently, Finland and Ireland) have experienced episodes of technical recession in the last three years. Only Germany, Austria and Estonia have experienced deep economic recessions, with two consecutive years of contraction in real GDP, mainly amid the shocks of the energy crisis that erupted with the war in Ukraine.
The technical recession should not have come as a surprise
The National Bank of Romania underlined a year ago the sharp slowdown in domestic demand and the reduction in the economic growth rate below potential, as a result of the change in the conduct of fiscal and revenue policy, in order to recover the fiscal-budgetary position. The prospect of a technical recession has been included in the forecast scenarios since the end of last year.
These developments came after a year 2024 with modest economic performance, given low external demand and climatic conditions that affected the agricultural sector’s contribution to GDP. The strongly expansionary fiscal measures in 2024, although they supported domestic consumption, had the effect of worsening the external deficit, with excess demand largely covered by imports.
The slippage of the budget deficit and the deterioration of the external balance have made it necessary to consolidate public finances. Fiscal adjustment measures have become imperative to ensure macroeconomic stability and mitigate the economy’s vulnerabilities to external shocks, in a context in which Romania is facing a severe increase in public debt financing needs.
GDP estimates have been revised since December 2025, with negative values forecast for the fourth quarter, whose economic decline (-1.9%) compared to the third quarter proved to be much more severe than the most demanding estimates. Significantly, most of the indicators correlated with the evolution of GDP, such as the volume of trade turnover, industrial production or real wages, were already positioned on a trend of restriction of economic activity.
In 2025, Romania continued the downward slope of the economic cycle
The year 2025 meant an accentuation of the downward phase of the economic cycle, in a European context generally marked by modest economic developments. For the last quarter of last year, growth at EU level was estimated at only 0.3%, with a relatively broad spectrum between member states, from -1.9% for Romania, followed by -0.6% in Ireland, and up to 1.7% in Lithuania. Also, some countries in the region, such as Hungary and the Czech Republic, recorded modest economic growth values of less than 0.5%, but Poland grew by 1%, according to signal data.
The economic cycle indicates the alternation of upward periods, of expansion of economic activity above the sustainable potential of the economy, with downward periods, of economic stagnation or contraction. In the latter, households are calibrating their spending more carefully, given the constraints of real incomes, the degree of uncertainty and the more reserved expectations regarding the financial situation. Firms are becoming more selective about investment projects and adopting stricter spending controls. The creation of new jobs is reduced, as is the utilization of production capacities.
A key indicator for assessing the cyclical position of an economy is the GDP (output-gap). Data on Romania’s quarterly growth and cyclical position show that the GDP gap has been on a downward trajectory since 2024. The demand gap then deepened throughout 2025. These developments reflect the restriction of household consumption, especially in the second half of 2025, as a natural response to fiscal adjustment measures, but also to the still restrictive nature of financial conditions.
Developments in the labor market contributed to the negative revision of expectations regarding the economic outlook, financial situation and job stability. Such expectations favored precautionary behaviors in consumption and saving. The unemployment rate is approaching its highest level in recent years and the number of job vacancies is falling to a level comparable to the cyclical adjustment period of 2010–2012.
Although economic growth has been modest since the beginning of 2025, this year can be considered important in terms of the necessary transition of sources of economic growth. A sustainable change in the growth model means moving from a predominantly consumption-based dynamic to investment-based economic growth, as shown in the chart above. Favorable dynamics were recorded both in the case of investments in machinery and means of transport, as well as for new constructions.
These developments were also supported by bank loans granted to companies for equipment financing, loans whose share exceeded 30% at the end of 2025, from about 27% in December 2024. It is relevant that investments based on the implementation of projects from European funds support long-term economic growth, through competitiveness and crowding-in effects.
The decline of the economy has become visible from 2024 onwards
The slowdown in economic growth was noticeably accentuated in 2024, when Romania recorded, after the recent recalculation of the statistical series, two consecutive quarters of decrease, by 0.4%, in economic activity. This statistical recalculation would now indicate, in an ex-post register, also a technical recession. In fact, the modest performance (+0.9%) of 2024 reflects the manifestation of the downward phase of the economic cycle.
The economic decline, both quarterly and annually, occurred despite unprecedented fiscal stimulus in the post-pandemic period. The record budget deficit of 9.3% of GDP in ESA terms is significant, given that the discretionary increase in the deficit was mainly oriented towards consumption. However, this unprecedented budgetary effort has also been fruitless in terms of economic growth, resulting in the accumulation of burdensome macroeconomic imbalances (“twin deficits“).
The abundant budget increases in 2024 fueled both the consumption of the population and that of the administration, both increasing at consistent annual rates of about 5%.
However, although consumption contributed 3.2 percentage points to GDP growth, the net effect on economic growth was limited. The advance of domestic demand translated into the expansion of imports, and the result was the modest pace of economic growth of 0.9%. In fact, the increase in consumption in Romania has supported the increase in production in other countries, from where Romanians have heavily imported consumer goods and services.
That is why domestic production must be a key priority for Romania. For example, the volume of industrial production experienced successive reductions in 2023 and 2024 (-3% and -1.6%, respectively), and this trend continued in 2025, with a decline of -0.9%. The losses of competitiveness and the increase in the costs of domestic supply accentuated the contraction of production and delayed the recovery of industrial activity. However, the third quarter of last year showed relatively promising results in the industry.
In 2025, in the context of inherent fiscal adjustments, the decline of the economy continued to deepen, especially in consumption. Thus, consumption has contracted since the first quarter, even before the adoption of the fiscal adjustment packages. Consumption is the factor whose contraction is directly and rapidly felt in the pace of economic growth, hence the negative impact on growth in the first quarter (-0.6%).
Priority of strengthening public finances
Any large-scale budget adjustment means costs in terms of economic growth. In a year with important adjustments in the public finances, such as 2025, the pace of economic growth was expected to slow down.
However, the economy grew in 2025 at a pace that is not negligible, given the scale of the fiscal consolidation measures applied. Economic growth of 0.6% is not very far from that of 2024, when the economy grew by 0.9%, despite a fiscal expansion that seemed to revive “wage-led growth” illusions.
The economy remains in the area of modest performance, but it is notable that this economic growth was mainly supported by investments and structural factors.
In this context, we can note various opinions that deplore the technical recession and end up questioning the very need for budgetary adjustment, an extreme scenario, impossible to imagine. Even without the adjustment measures, Romania’s economy would not have grown in 2025, as in the past, just as it did not in 2024!
However, there is no alternative to the need for fiscal consolidation. The consequence would be a country rating with drastic, incalculable implications on economic and financial stability.
Therefore, the first step of an honest debate is to understand Romania’s imperative regarding the consolidation of public finances. No economy can grow healthily at the expense of severe budget deficits, which mask performance and postpone costs. And the increase in public debt ends up costing dearly and requires painful corrections.
We must continue to strengthen public finances, but in a balanced way, ensuring as much as possible a certain social cohesion and the necessary political consensus in such fragile times, dominated by multiple external, economic and security challenges.
At the same time, it is particularly important to support the drivers of economic growth so that the economy returns to positive territory. Adjustment efforts will be all the more sustainable as the economy accelerates its annual growth rate. Otherwise, in the absence of more consistent economic growth, the public deficit remains a burden.
In the register of economic growth, one can also read, to a certain extent, the somewhat accommodative path of monetary policy, of the “wait-and-see” type, which maintained the reference interest rate for the entire year 2025, in the context of the reactivation of inflation, but through fiscal-administrative channels. The “fine-tuning” aimed at the restrictive nature of monetary conditions that would optimally reconcile the objective of disinflation, but also the protection of economic growth.
Fiscal policy cannot afford more serious accommodation “adjustments” anytime soon. The measures so far ensure that fiscal consolidation is back on track, but it is important that they are backed up by structural reforms and competitiveness-focused policies.
In 2026, efforts to support the entrepreneurial environment and attract major investments in the economy require adaptation to the vulnerable context, but also prudent dosage.
There are inherent risks that the negative momentum will extend beyond the two quarters of “technical recession”. That is why political stability of governance and confidence in the investment environment are key priorities for economic recovery.
The budget for 2026, although delayed, is a test of economic maturity. Reforms and adjustments managed in a balanced and responsible manner will strengthen investor confidence and financial markets, and the economy will be able to return to a healthier footing.
By accessing European funds, especially through the PNRR, Romania implements the most important reform program that exists since it joined the European Union.
2026 must be the year of European funds for Romania’s development!
Romania between technical recession, inflation and recovery hopes
