Recently, the National Institute of Statistics announced an annual GDP growth of 5.7% in the first quarter of this year. This value surprised analysts and stirred up the spectrum of comments, from suspicious-negative to enthusiastic-positive. How has this result been reached? But especially, what are the prospects for the Romanian economy in the next period of time?
With remarkable economic performance, Romania accelerated further its growth in 2016. GDP exceeded all expectations and grew by 4.8%. If the local businesses are relatively cautious, the international players see Romania as one of the most attractive markets in Europe and even globally.
This important growth has qualified Romania in the strategic plans for expansion of international companies as one of the core economies of Central Europe along with Poland, Hungary, the Czech Republic and Slovakia. At this moment, Romania is on the podium of most attractive markets for business development in the next 3 years, after Russia and Poland, and surpasses Turkey.
In order to get a clearer picture, we propose to look at the figures, but not in any way, but taking into account their traceability and the direction to which they look. I add that some are final and confirmed, others just published and whose validity is to be confirmed in the coming quarters. Therefore:
In 2016, the leu was one of the most stable currencies in the region, depreciating by only 1% against the dollar and the euro. Even if the historic minimum of 4.57 RON/EUR for the past 4 years and half was reached on 19 May 2017, the average expected for this year is of 4.47 RON/EUR and 4.23 RON/USD. It is very likely that this depreciation of the leu is the contextual result of the low level of tax collection in the first quarter, external borrowing that sustained announced wage increases and relaxed fiscal policies.
National currency pressures are reduced as the current account is slightly negative, currency reserves are stableand inflation is relatively low (even though increasing). The interest rate policy remained at 1.75% as of May 2015 and it is estimated that nothing will change until 2018, when inflation is expected to exceed NBR’s target of 2.5%.
Consumer prices and inflation
Consumer prices have been declining since 2015, but it seems that they are now returning to positive values,with an estimated 1.3% increase in 2017. The signal of rising consumer prices has been seen since January 2017 when the impact of VAT cuts have spread across the economy. In March 2017, consumer prices grew again slightly, mainly due to higher food and service prices.
Currently, lower VAT, the prospect of wage growth in more and more widespread social categories, will drive demand growth and push prices higher. The rise in consumer prices is on the back of an anticipated increase in inflation that will approach NBR’s target of 2.5% in 2017, potentially reaching 2.9% in 2018.
Inflation has been negative over the past two years, but has been mainly driven by lower VAT on food and beverages in the first phase, and the overall fall in VAT subsequently. It is quite possible that energy price liberalization and wage growth shall put pressure on rising inflation even in the period 2018-2020.
The rate of increase in consumption, which was quite high in recent years, declined in January and February 2017 despite wage increases. This trend was predominant in November and December 2016, when, after two-figure increases year-on-year, retail sales rose by one figure, reaching 6.2% in January 2017.
Naturally, one would say, given the foreseeable fall for the beginning of the year. But retail sales revenues estimates will not be as big as those in 2016. Even though commercial banks have relaxed consumer credit, retail sales performance is lower than estimates and boasts a 4.2% increase in consumption.
However, consumption remains the main growth driver sustained by wage growth and falling unemployment from 6.3% in February 2016 to 5.4% this year. Unemployment drops the consumer confidence indicator from -63 in 2010 to -10 in recent months. Lowering VAT to 19% for all products and services, and specifically for food from 24% to 9%, has facilitated the increase in incomes and consumption.
Industrial production and investments
Industrial production continues the growth trend of August 2016. In the first two months of this year industrial production rose by 5.7% and 5.5% respectively. Manufacturing reported an increase of 8% while mining and energy decreased by 3%.Industry rose by 1.7% in 2016, a 7% increase in Q1 of this year compared to Q1 2016, and is projected to increase annually by 3.5% in 2017 and 3.7% in 2018.
Investments are expected to grow in 2017 as European funding for the 2014-2020 period will gain momentum. In this respect, Romania is scheduled to receive 22 billion EUR of structural funds and 18 billion EUR to finance agriculture as part of the common agricultural policy.
Even if exports rose by 7.6% in 2016 compared to 2015, imports grew by 9.7% in 2016 compared to 2015. Exports rose from 4.1 billion EUR in early 2016 to 5.3 billion EUR at the end of the year (with a slight decrease in December 2016). Automobiles and transport equipment accounted for 47% of Romania’s total exports. Car registration increased a lot last year and reached 120,000 units in 2016 before dropping to 100,000 units in early 2017.
Foreign investment is positively stable at 3-5 billion EUR, after the 27% increase in the post-crisis period in 2013 and incomparably lower than the 13 billion EUR record before the crisis.
Bringing it all together
In this optimistic business environment, there are signals that indicate an economic deja-vu. It’s like we’ve lived this period some other time, even though we did not live it in the same coordinates. As though there was another time when we were witnessing salary increases, as banks relaxed lending, as if we saw an increase in imports, as if we were seeing increases in the real estate and automobile markets, as well as optimistic retail sales reports and as if we were doing it well.
Only that, on the backdrop of this deja vu, the European Comission has warned Romania of overtaking the 0.5% medium-term budgetary objective (MTO), which is now 2.6%. The IMF also drew attention to overcoming the budget deficit target and raising it to 3.7% this year. The Fiscal Council has also fired repeated alarm signal.
Who should we then ask about the health of the Romanian economy? At a routine control, Romania lives the dilemma of trusting the doctor who recommends a diet and the temptation to consume all what it wants.