The economic recovery is getting shape
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VLAD MUSCALU
Economist
ING BANK N.V. AMSTERDAM - BUCHAREST BRANCH
■ Macroeconomic data supports our view for positive GDP growth in 1Q11, but worries persist on what currently seems like a very fragile recovery.
■ Growth in industry alone is not able to bring about an economic recovery and IFO suggests we should expect a substantial deceleration in industrial output.
■ The same indication is coming from external demand.
■ Retail sales surprised on the positive side which is good for private consumption. But again, is this sustainable?
■ We feel comfortable with our forecast of 0.3% for 1Q11 GDP and we do not exclude an even better reading.
■ Monetary policy will likely be restrictive and not growth-supportive this and next year.
■ Other limiting factors are: another year of falling real wages, rising crude prices and rising interest rates in the Euro area.
What sort of economic recovery?
Macroeconomic data supports our view for positive GDP growth in 1Q11
The macroeconomic data released early April reinforces expectations for positive GDP growth in 1Q11. Even with some corrections in the main economic sectors during March, it becomes very hard to expect a negative print for GDP at the start of the year. This could happen only if we witness a very sharp fall in agricultural output and/or in the net taxes component of GDP on the supply side.
But worries about a “true” recovery are present
A positive number would be good news as it would represent another quarter of growth after the 0.1% registered in 4Q10. Yet, the big question mark is whether growth is achievable in the following quarters as well. In what follows below, we talk about growth scenarios and the associated risks.
Industrial output – strong growth driver?
Growth in industry alone is not able to bring about an economic recovery
As can be seen in Figure 2, Romanian industrial output grew strongly starting in 2Q09 (with one exception). Yet, the growth rates were not enough to bring economic growth on a continuous basis because industry’s share in GDP is about 25% and all the other components did poorly.
IFO suggests we should expect a substantial deceleration in industrial output...
We look at IFO survey results to get a general feeling about how industrial output might change in future months. The link between the two series is not as good as for CE3, but still offers good signals. It now shows (Figure 1) we should expect a slowdown in monthly growth rates or even negative growth rates for the period ahead
...for the other three quarters
This is especially true because growth in industry accelerated since July last year, but IFO numbers were and are still pointing to deceleration. The conclusion is that, with the exception of 1Q11, when we expect industrial output to grow by about 2.8%, for the other three quarters we expect growth to range between -0.1% to a maximum 1%.
Developments in Germany basically suggest the same thing
Slower growth rates in industry are likely also if we look at industrial output in Germany. The link is not as good as in the case of IFO, but it clearly shows that a slowdown is taking place. Moreover, taking into account the ING view on the German economy, where a slowdown is expected from 4.5% in 1Q11 to about 2% during the last three quarters, the slowdown in Romanian industrial output is to become more and more evident.
Some cooling in industrial output is likely based on market expectations for weaker growth in emerging countries (for example Turkey, which is an important trading partner and where growth might be half of the one seen last year).
Slowdown in external demand is not good news for GDP dynamics
The expected slowdown in industry coming from weaker external demand is not encouraging news for GDP developments for the rest of the year. An important sector that positively contributed to growth is just about to start feeling some pain. Yet, generally speaking, the contribution to quarterly GDP growth rates will remain positive, just below those seen during 2010; back then we had growth rates between 1.3% and 3.1%, with the exception of one quarter when output contracted by 1%.
Retails sales surprised on the bright side, which is good for consumption...
On the other hand the signs from retail sales are encouraging as they signal some recovery in consumption. The funny part is explaining these increases. Wage increases were weak at the start of this year and lending was actually very weak. Probably the explanation resides on the wage increases in the public sector that started in October last year and continued until January this year. It might be also about the recovery in consumer sentiment, though it was quite weak so far. They can explain some pick-up in retail sales, particularly after the big falls seen after austerity measures were implemented.
...and could support a positive contribution to GDP from services overall
Nonetheless, after falling by about 2.6% in 3Q10 and 4.3% in 4Q10, we expect a growth of about 0.7% in retail sales for 1Q11. The growth for this sector is a certain thing even if in March we see a sharp contraction in retail sales – which we do not expect. Therefore, very likely the contribution from services will be slightly positive (we see it marginally above zero).
Construction activity disappointed
The news from the construction sector was not that good: after a rise of 6.7%, a contraction of about 2.5% is expected this quarter. Basically it means that the contribution from the construction sector is to be negative, but only mildly negative. Overall, we believe the rise in the services sector will compensate for the decrease in construction activity.
Arithmetic suggests GDP growth of 0.6% in 1Q11...
Assuming the dynamics in agriculture and net taxes are neutral for GDP during 1Q11, then a GDP growth of about 0.6% is the outcome of the arithmetic. For the last quarter of 2010 the same procedure was yielding a GDP growth of about 0.8%, but it was just 0.1% (the rest is “explained” by the statistical discrepancy).
... but 0.3% seems to us more likely
Taking all of the above into account, we feel comfortable with our forecast of 0.3% and we do not exclude even a better reading on May 13th. Yet, even such a scenario would not actually show a significant improvement in GDP growth drivers.
