UNICREDIT BANK S.A.

 | 

ANCA ARON

  |  08.09.2015

Consumer optimism not enough for stable growth

The Romanian economy started the year on a strong footing with a 4.3% yoy growth in 1Q15, above the 2.6% expected by the market.

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UNICREDIT BANK S.A.

ANCA ARON

ANCA ARON

SENIOR ECONOMIST at UNICREDIT BANK S.A.

Private consumption had the highest contribution, generating 3/4 of the growth in 1Q15. For 2015, we expect an economic expansion of around 3.7%, boosted by private consumption to a similar degree. Under these circumstances, it is no wonder that consumer sentiment reached 7-year highs in June.


The buoyant consumer sentiment was supported through several channels, first of which being a significant increase in wages. The Romanian government implemented successive hikes to the minimum wage, which was taken from RON 700 to RON 1,050 in just three years. At the same time, the minimum wage is projected to reach RON 1,200 in 2016. As the level of the minimum wage increased, more and more employees benefitted from each hike, with the one in July 2015 affecting as many as one third of the employees in the economy (excluding armed forces and similar staff). The effect on spending is positive, but the one on the economy is negative because the wage growth outpaces productivity growth, impairing Romania’s competitiveness.


Moreover, there is a risk that high minimum wages will push more lowskilled employees to the grey market in order to find a job. Wage hikes on the one hand coupled with the very low inflation rate on the other hand kept the average real wage growth above 6% yoy during the first five months of 2015.


The lower VAT for food products (9% as of June, down from 24%) boosted consumption through a reduction in June food prices by 8.23%mom and by 5.95% in comparison to the prices prevailing in December 2014. On top of the above-mentioned positive effects, the government boosted consumer spending by paying the overdue wages for teachers in advance: at the end of 2014 for 2015 and in 2015 for 2016. Populist measures did not stop here in pre-election year 2015: the government doubled the child allowance to RON 84 per month from June, hiked wages for some categories of public sector employees and allowed local administrations to hike wages of their employees if the local budgets have the resources.


Besides wages, household lending in RON has accelerated continuously since bottoming out in October 2013, growing by 19.6% yoy in May 2015. Demand for new lending increased, although it remains below pre-crisis levels. A preference for RON lending was visible, supported by NBR’s easing cycle that led to a decrease in costs and a lower interest rate differential between RON denominated and FX-denominated loans. At the same time, clients became more sensitive to exchange rate movements, while the large stock of FX lending (still above 50% of the total credit stock) led the NBR to encourage RON lending in order to protect households from depreciation risks.

 

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