The Economic Activity Probably Reached the Bottom

RAIFFEISEN BANK S.A.

In Q2 2009 real GDP decreased by 8.7% yoy (after -6.2% yoy in Q1) and by 1.1% from Q1 2009 (in Q1 2009 the GDP contracted by 4.6% from Q4 2008 and in Q4 2008 the GDP contracted also by 2.8% from Q3 2008). Over the first half of the year Romania's GDP decreased by 7.6% yoy. Growth rates both for household expenditures and investment decelerated rapidly in the last quarters due to deterioration of economic perspectives and credit standards tightening. Annual growth rate of gross fixed capital formation stood at -25.6% yoy in Q2 2009, decreasing rapidly from +24.3% yoy in Q3 2008. At the same time, household expenditures decreased by 15% yoy in Q2 2009 after they have been expanding by 15% yoy in the first three quarters of 2008.

In last months, some signs of stabilization were seen in case of industry. The industry is the only sector with a slight improvement in the output over the last months. However, the improvement is mainly driven by the automotive industry whose exports were boosted by the car scraping programs in western countries. Decline in retail sales lost also speed in last months. Here, the most affected are the sales of automotive fuels which fell by 21.8% yoy in Q2. Sales of non-food products (-12.7% yoy in Q2) were also much more affected than those of food products (-3.3% yoy in Q2).

Note: growth rates are based on seasonally adjusted data, in real terms

Source: Eurostat, National Institute of Statistics, Raiffeisen RESEARCH

Source: Eurostat, National Institute of Statistics, Raiffeisen RESEARCH

Contraction of output in construction sector accelerated in the second quarter. Construction output fell by 12.9% yoy in Q2 after it expanded by 3.5% yoy in Q1 2009. Residential sector was the most resilient until now, with output increasing by 24.2% yoy in Q1 2009 and falling by 0.2% yoy Q2. Many projects started in the previous years are now completed. However, we expect the performance of the residential sector to deteriorate substantially in the next period. Permits for residential buildings fell by 49.5% yoy in first half of 2009 in terms of usable area. Until now, the most affected were the non-residential and civil engineering segments. Output in non-residential segment fell by 2.0% yoy in first half of 2009 (-12% yoy in Q2), while output in civil engineering segment shrank by 13.3% yoy in first half of 2009 (-19.7% yoy in Q2). Drop in output of the civil engineering segments reveals weak public investments in infrastructure.

We think that the economic activity moved close to the bottom in the second quarter of 2009. Nevertheless, we expect to see an improvement in economic activity only in the last quarter of the year. Adverse climatic conditions and the delays in public investments would most likely have a negative impact on the GDP growth rates in Q3 and Q4. We expect now the real GDP to contract by 7.5% in 2009.

Source: Eurostat, National Institute of Statistics, Raiffeisen RESEARCH

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