A delayed and gradual economic recovery, in a challenging macroeconomic environment

Noiembrie 2011

IONUT DUMITRU - Chief Economist / Treasury and Capital Markets NICOLAE COVRIG - Financial Analyst / Treasury and Capital Market RAIFFEISEN BANK S.A.

Real GDP re-entered on an upward trend at the end of 2010, growing for three quarters in a row. Although positive, the quarterly GDP growth rates in the last three quarters (+0.4% qoq in Q4 2010, +0.5% qoq in Q1 2011, and +0.2% qoq in Q2 2011) only paint a picture of an economy which is struggling to get out of therecession. The plunge in the economic activity in 2009-2010 should have been followed by higher quarterly growth rates in the earlier stages of the economic recovery, especially in case of consumption and investments in equipments and machinery.

Although the economic growth this year is on the way to meet the expectations prevailing at the end of 2010 (growth of 1.5% in 2011), the year-to-date dynamics of private consumption and investments is disappointing and below initial expectations. Our initial forecasts, but also the official forecasts regarding the dynamics of private consumption and investments in 2011 have large chances to be missed given the dynamics of the two components year-todate. In fact, the advance in real GDP over the last quarters was supported by external demand which boosted the activity of export oriented industrial sectors, exports, and inventories.

The real GDP would grow further in Q3 and in Q4 2011. The outstanding vegetal agricultural output (very good crops for cereals, technical plants, fruits and vegetables) due to good climacteric conditions should have a large contribution to the quarterly GDP growth rate especially in Q3. The contribution of agriculture would be large enough to offset for the deterioration of the activity in other sectors. Theagriculture might help GDP to grow even faster than 1.5% in 2011 if exceptionally good.

However, the last three months were marked by a substantial downgrade in economic growth expectations for 2012. For instance, we revised downwards the GDP growth forecast for 2012 from 3.5% to only 1.8%. The government’s official forecast for the economic growth in 2012 would be made public at the beginning of November, but recent comments suggest that it would be lowered to around 2% from 3.5-4% previously.

The main reasons for the downward revision of the economic growth forecast for 2012 are the deterioration of growth prospects for the external markets (especially for the Euro area) and the failure of domestic consumption and investments to regainmomentum after the plunge in the last years. Clearly, economic recovery in Romania proves to be much difficult than initially expected.

Very likely, the speed of economic growth will remain a key topic in 2012. We think it should be analyzed and considered in a broader context, which should take into account the constraints raised by evolutions on the external markets (debt crisis in the Euro area and slowdown of global economic growth) and some tendencies in the domestic economy (a deleveraging tendency at the level of the private sector and the need for fiscal consolidation).

 

Strong impact from evolutions on the external markets

At the moment, as a member of the European Union, Romania is fully integrated in the international markets of capitals, goods and services. In the last period, the growth expectations for the Euro area in coming quarters were revised downsubstantially. For instance, the most recent forecasts from the European Commission point to only a marginal advance in real GDP of Euro area in Q3 and Q4 2011, while international analysts (including Raiffeisen RESEARCH) see the economic growthremaining subdue throughout 2012 as well. Stagnating or only slowly growing external demand should have a negative impact on the activity of the export oriented manufacturing sectors, limiting their growth. The impact should be clearly visible in case of metallurgy, chemicals, automotive, and transport means sectors for which exports are very important. While the activity increased very rapidly in 2010-2011 in these sectors, the growth might slow down in the coming quarters if external demand growth deteriorates. Prospects for turnover, profits and employment in these sectors are much weaker now than they were few months ago. Although we are still looking for a positive contribution of industry to the GDP growth in 2012, we think the contribution has large chances to be much lower than in 2010 and 2011.

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