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October 23, 2021

The light at the end of the tunnel

Dr. Lucian Anghel Chief Economist, Banca Comerciala Romana

The structure of the economic growth for the second quarter of 2009 brought a mixed picture – some negative information (which was already known before, at least partially) and some tentative signs of stabilization or even improvement in other areas.

On the negative side, the severe decline in households consumption and companies investments (mainly in equipments and means of transports) are worthy of note. On the positive side, the slight improvement in industrial production as compared to the first quarter of 2009 is the most important evolution – Euro Zone countries definitely played a key role in this respect and higher external orders supported Romanian car industry. I think every Romanian should thank Germany and France, which combined make some 48% of the total Euro Zone GDP, for their generous government stimuli packages with echoes in Romanian industry.

At this moment, the major threat for all of us is to claim the victory against the recession too soon and to put a brake on structural reforms. Some people already see the light at the end of the tunnel, but we should be aware that it might be a train coming towards us.

There is a unique chance to exit stronger from the current recession if the ambitious but realistic reforms agreed with the IMF and European Commission are completed in time. We should do our homework very carefully in some key areas – the reform of the current pensions system which is not sustainable in the long run, the new law regarding a more fair, transparent, simpler and efficient public remuneration system. State budget should gradually become capable to save money from wages, pensions and social expenses in order to redirect them to infrastructure projects. New jobs will be created in this way, Romanians will finally enjoy decent roads on their way to the holiday destinations and strategic foreign investments will be no longer lost because of high transport costs on road for finished goods.

The coming months might bring more positive statistics – industrial production will continue to recover some of the lost ground, foreign direct investments might produce a positive surprise as compared to early-2009 pessimistic scenarios regarding a collapse this year, inflation rate will go down further, current account deficit will halve against 2008 reducing Romania’s external vulnerability, RON might remain rather stable.

But at the same time, there will be negative statistics on labour market – unemployment is expected to remain on an rising trend over the next quarters, wages will decrease further and the creation of new jobs in the private sector will be quite slow and uneven.

2010 economic growth will not be strong enough to improve labour market conditions. Besides the severe adjustment already experienced by the private sector of the economy in the first six months of 2009, the public sector is starting only now to feel the cold wind of recession and this might have additional negative consequences upon labour market. When Romania will finally exit the economic recession, the labour market will show a rather different landscape – natural unemployment rate will be higher than before the crisis, wages growth will moderate and will be done in line with labour productivity, the shortage of skilled labour force in some areas will be no longer a top issue. Private companies will adjust their businesses to the new environment and will employ less people, as new optimization processes will be put into place during all these years. The retirement age might be increased gradually for a better position of the public pension system. Private pensions systems will receive a greater interest from people working in all areas of the economy because they represent a stable alternative to the state pension system which is subject to political fluctuations.

If we all can cope with this new situation on the labour market, then I think we have an important opportunity of seeing a considerable stronger Romanian economy in the coming years.

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