Romania’s Economic Recovery - Lagging behind
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Noiembrie 2010 |
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JOAN HOEY - Senior Analyst, Central and Eastern Europe
THE ECONOMIST INTELLIGENCE UNIT |
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JOAN HOEY
Senior Analyst, Central and Eastern Europe
THE ECONOMIST INTELLIGENCE UNIT
Romania was one of the last EU economies to enter recession, with quarter-on quarter growth turning negative only in the third quarter of 2008. It will also be one of the last EU economies to exit recession and make a sustained recovery. The Economist Intelligence Unit (EIU) is forecasting a further year of negative growth in 2010, when the economy is expected to contract by 2% year on year, before positive growth of 1.7% returns in 2011. By contrast, average growth in the Euro zone economies is forecast to reach 1.4% in 2010 and to decelerate to 0.8% in 2011.
Following a deep recession, global growth resumed in the second half of 2009 as a result of the aggressive fiscal and monetary stimulus measures undertaken in many countries, setting the stage for the upturn in 2010. World real GDP is forecast to grow in 2010 by 4.4% at purchasing power parity (PPP) exchange rates and by 3.1% at market exchange rates.
Emerging markets are leading the recovery, whereas growth in developed markets has been sluggish. Global growth is unlikely to return any time soon to the pre-2008 trend rate, as it will be constrained by the after-effects of the crisis in 2008-09. The subdued medium-term outlook reflects the need for massive balance-sheet adjustment among households and financial institutions in many developed economies.
A modest recovery in the Euro zone
Trends in the Euro zone remain a critical driver of activity in many transition economies, and the Euro area's weak recovery will constrain growth in Eastern Europe. Fiscal consolidation, household retrenchment and banking sector balance-sheet repair will constrain Euro area growth for some time. The risk of contagion elsewhere in Europe from Greece's fiscal crisis will remain high. Unemployment in the Euro zone is high and this will affect private consumption.
In May 2010 the EU agreed a package worth EUR 110 bn (USD 143 bn) to avoid a Greek default, and another package, of EUR 750 bn, was put together to back up other peripheral Euro area countries after their bond yields surged as a result of concerns over unsustainable levels of public debt. This has calmed the markets, but concerns about sovereign debt remain. Although the German economy expanded by 2.2% in April-June 2010 in quarter-on-quarter terms, this came largely as a result of a temporary, stimulus-induced bounceback in world trade growth. It is unlikely that Germany will sustain this performance, and signs of an imminent slowdown have already emerged.
The risks to the global economy remain significant. Despite the recent softening of global economic data, we maintain our view that a double-dip global recession is unlikely, although we assign a 30% probability to such an outcome. Rather, the deceleration in growth should be seen as a natural adjustment from a period of unsustainably rapid stimulus-driven activity since mid-2009.
Private-sector balance sheets in a number of leading economies have improved since the height of the crisis, as consumers have been forced to scale back liabilities. However, this has been partly matched by rising indebtedness in the public sector, creating concerns about sovereign debt sustainability.
Governments are under increasing political and market pressure to reduce budget deficits, especially in view of the recent turmoil in the Euro zone. This will result in the stimulus being withdrawn, even if economies are still too weak to grow without government support. There is a significant risk that other sources of demand will be insufficient to keep the recovery going.
Eastern Europe hit hard
The global crisis in 2009 hit Eastern Europe harder than any other emerging-market region. However, as in other areas of the world, the recession bottomed out in most of the region towards the end of 2009. Increasing demand from Western Europe boosted exports and industrial output. The region also benefited from the recovery in risk appetite globally in early 2010, which lasted until the renewed market volatility induced by the Euro zone crisis.
Recent performance in the region has been mixed, but the dominant trend has been one of improvement. Among countries that report seasonally adjusted quarterly GDP, only in Hungary was the second quarter of 2010 worse quarter on quarter than the first. In others, there was either improved positive growth (at modest rates) or a deceleration in the rate of decline. Year-on-year growth rates in real GDP were positive and edged upwards in most countries in the second quarter. Exceptions were three of the Balkan countries (Bulgaria, Croatia and Romania) and Latvia, although in all four the year-on-year rate of decline in GDP was slower or the same in the second quarter compared with the first.
As in 2009, Eastern Europe will remain the weakest-performing emerging-market region in 2010. Above-average growth in many CIS economies, driven primarily by a recovery in commodity prices, will pull up the transition average for 2010, to a forecast 3.4%. However, in each country outside the CIS, bar Slovakia, growth will be slower than that. Average real GDP growth will still be negative in the Baltics and the Balkans, and only 2.3% in East-Central Europe.
The recovery is expected to strengthen from 2011, but this will be subject to considerable uncertainty and risks. Average growth in the region is forecast to accelerate to 3.8% year on year in 2011, as external demand and credit availability tend to pick up, and as unemployment starts to trend downwards. This will still be well below pre-2008 growth rates, which were in the main above potential and thus not sustainable.
The pick-up in leading trade partners in the Euro zone has been relatively modest. There is little prospect of a strong recovery in foreign direct investment (FDI) inflows. Credit conditions are still generally tight and private consumption has been constrained by high unemployment. In many countries, fiscal tightening is on the agenda, including in countries with IMF programmes. In 2009 the IMF was unusually lenient compared with the way it has acted in the past. For many countries, however, it will have been a case of pain deferred, as fiscal retrenchment is required in 2010-2011. Business and consumer sentiment in the region is fragile, and the region's currency and bond markets are vulnerable to contagion from problems in the Euro zone or a rise in risk aversion more broadly.
The region's recovery remains at risk from possible banking sector problems. There are question-marks about the state of west European banks' portfolios, and a lot of the uncertainty affects the investment plans of these banks in Eastern Europe. Although fears that foreign banks would make large withdrawals of capital from the region have so far proved unfounded, there is still a risk that a new bout of financial difficulties in Western Europe could lead to parent banks diverting capital to their home markets. Furthermore, under any scenario, lending by these banks in the region will be much more subdued than in the past. The Greek crisis poses particular risks in this regard for several Balkan economies.
The recovery in the Balkans is very sluggish and the subregion’s economies are forecast to contract further in 2010. A number of Balkan economies remain vulnerable to crises. In addition, the Balkan countries, Romania among them, are exposed to fallout from Greece’s problems because of investment, trade, remittance and banking links.
