Economic Outlook
Adresa
Bulevardul Iancu de Hunedoara, Nr. 48
011745 Bucureşti, Sector 1
Telefon
+40-21-222.16.00
Fax
+40-21-222.14.01
Website
www.ing.ro
August 2009
Searching for clues
Back in January when we released the -3.5% forecast for economic activity, we warned about significant risks for a worse outcome because of both global and domestic developments. Although our view was seen as overly pessimistic and only another foreign analyst had a forecast of -3% at the year's start, the 1Q09 GDP data gave a clear indication that the output contraction has intensified and a deeper recession should be expected in Romania in 2009.
We are updating our forecast, but warning again about the possibility for an outcome even worse than this new view.
A deeper-than-expected recession
Specific factors behind the slump in local economic activity
As we pointed out, besides the global downturn there are also specific factors behind the slump in local economic activity. The data we had lately was generally more negative than we expected: in May, construction output fell by 25%, industrial output by almost 10% and retail sales by more than 10%. With the exception of industry, the others posted a deterioration in performance vs. 1Q09, which points to further contraction in 2Q09. Lending activity further contracted in April, May and June and its prospects are grim. Moreover, given the disappointing detailed GDP data, along with the bleaker regional and internal outlook, we believe that there are sufficient reasons to change our forecast from -3.5% to -7.1%. So, after Romania grew, overheating by 7.1% in 2008, we now forecast -7.1% for 2009; this shows there are significant base effects included in the 2009 contraction. The new forecast incorporates a poor agricultural year, but not a disastrous year.
There are risks for an even weaker performance
We stress once again there are risks for an even weaker performance, largely depending on the agricultural year. An extremely poor agricultural year could push the 3Q09 annual rate above -10% and might also lead to very strong upside pressure on prices starting in August. Therefore, the fall in GDP could be even greater, but we plan to update our forecast only after 2Q09 GDP data is released.
As can be seen in the chart above, we expect GDP growth to enter positive territory only in the third quarter of 2010 when expressed in annual terms. Nonetheless, on QoQ, seasonally adjusted data, we believe that 4Q09 should post a significant positive number.
1Q09 posted the sharpest decline in quarterly rates
What is also embedded in our forecast is that we believe that 1Q09 was the bottom in terms of quarterly rates and that going forward the pace of decline in economic activity could diminish. We believe that escaping the deepening contraction in terms of QoQ data is due to NBR action on the money market and its decision to cut the key rate, along with a more stable background due to the IMF deal.
The IMF/EU agreement and shifted focus in monetary policy from inflation to growth could only limit the recession. Moreover, since the relaxation in monetary policy came a bit too late (it started in April) and because of significant lagged effects, we think a positive impact on growth could be visible only later this year and/or early 2010.
We continue to see full-year 2010 GDP falling
We continue to see full-year 2010 GDP falling, in spite of our bleak view for 2009, which could result in strong growth next year if only from the base effect. Our forecast is mainly based on a deep recession this year and its likely heavy impact on budget execution along with harsh measures that are increasingly likely in 2010 - we believe higher taxes are almost impossible to avoid along with cuts in spending (these are actually postponed). Because of this, both private consumption and investment activity are likely to remain limited, while a positive net exports contribution might turn less significant than it is likely to be for 2009.
The positive news out of our revision is that we changed our inflation forecast as well. We now see year-end inflation around 6% vs. 7.1% previously and the lowest point in July at 5.2% yoy. We continue to see the disinflation process reversing in August because of supply effects like crude prices, a poor agricultural year and additional exchange rate depreciation.
The construction likely contracted in 2Q09
As can be seen in the chart below, there was only one sector that had a positive contribution to GDP dynamics in 1Q09: the construction sector. Yet, it was largely driven by a large positive number in January, given that afterwards construction output fell into negative territory; May was even worse as the contraction grew to almost -25%.
This means a contraction in the double digits for the construction sector is quite likely in 2Q09. Given that the other sectors are also likely to contract more - on annual rates - we expect sharp contraction in 2Q09 GDP and additional worsening in 3Q09.
