Economic overview - May 2011

5 Iunie 2011

RAIFFEISEN BANK S.A.

 

Highlights

Monthly inflation rate in April (+0.66% mom) came in above market expectations, driven mainly by increases in volatile food prices (fruits and vegetables) and in tariffs for electricity (+5% mom). Balance of risks to inflation remains on the negative side. We expect the end-2011 inflation rate to be at 5.3% yoy in December, with significant upside risks.

At the beginning of May, the central bank revised upward the end-2011 inflation forecast to 5.1% yoy from 3.6% yoy. It held unchanged the monetary policy rate at 6.25%. We expect the NBR to keep the key rate unchanged at 6.25% in the next three quarters. In our view, the central bank would be forced to increase the key interest rate only in case of additional large supply side shocks (increases in food prices in autumn), of sharp hikes in administered prices, or if the sentiment would deteriorate on the external markets.

Flash estimates showed real GDP increasing by 0.6% qoq and by 1.6% yoy in Q1 2011. Both growth rates were slightly better than expected. Details on dynamics of the GDP components would be available on June 8. However, available information suggests that domestic demand (consumption and investments) and/or inventories have increased in Q1. Data confirmed that economic activity embarked again on an upward trend. However, the recovery would be most likely moderate in 2011 and would accelerate in 2012.

Technical missions from the IMF and the European Commission had a positive assessment on the policies pursued by Romanian authorities in Q1 2011. They said that the government succeeded to keep the end-Q1 budget deficit below the agreed target and it made progresses in reducing arrears of the public sector. They said that prospects to meet the end-2011 budget deficit target are good.

 

Key events of the month

European Commission estimates Romania’s potential growth at 2% per year

The European Commission released recently its Spring 2011 forecasts for EU member countries. It expects Romania’s real GDP to grow by 1.5% in 2011 and by 3.7% in 2012.

The European Commission estimates the growth potential of the Romanian economy at 2% per year at the moment. This is much lower compared with the level estimated before the crisis (5.4% in 2007 and 5.2% in 2008). The decline in growth potential is explained by a much lower contribution from capital (investments).

In our view, Romania’s post-crisis potential growth might be a bit higher than European Commission’s current estimations (closer to 3% per year).

1

2

3

4

5

6

7

8

9

The tricky lag LUCIAN CROITORU Adviser to the Governor - BANCA NAŢIONALĂ A ROMÂNIEI Lucian Croitoru, Adviser on monetary policy issues to the National Bank of Romania Governor, talks about the NBR’s next moves and explains why the decrease ofthe policy rate hasn’t been reflected into lower interest rates on bank loans. mai mult... The turnaround CRISTIAN SPORIS Secretar de Stat - MINISTERUL ECONOMIEI ŞI FINANŢELOR Cristian Sporis, Secretary of State at the Ministry of Public Finance, in charge with the national treasury and public debt, explains how the state managed to borrow money at the lowest costs in the last seven years and how it turned from a clear market taker into a player with a strong position on the market. mai mult...