Romania likely to ease out of recession in 2011
Romania likely to ease out of recession in 2011
The economy poked its head into positive territory in 4Q10 (+0.1% q/q), helped mainly by external demand, which pushed exports up to record levels. Gross fixed capital formation nudged up 0.5% q/q, following higher investment rates in industry and construction. The severe austerity package implemented by the government last summer continued to weigh on household consumption (-0.8% q/q), while the government continued to cut expenditures, which shrank by 5.5% q/q.
On annual terms, the economy moderated its fall significantly (-0.6% y/y), and the higher contribution of the last quarter to overall GDP formation made the local economy contract by only 1.3%, compared to the market estimates of around -2%. Industry beat all expectations in 4Q10 and picked up 5.8% y/y, strongly underpinned by solid external demand, but also by the further recovery of domestic new orders. Construction as well as trade & services continued to smother the chances for an economic recovery, and it is important to mention that overall market sentiment edged higher. Agriculture has never ceased to surprise us, this time to the upside. It advanced by a pretty strong 7.4% y/y in 4Q10 and thus offset somewhat the negative trends seen in the first nine months of the year. It remains, however, the most erratic and hence difficult to forecast contributor to GDP formation which can bring either a ray of sunshine or create a cloudy outlook for the economy.
Romania basically remains a consumption driven economy and net exports can only have limited positive impact on economic growth at this stage of development. Changing the economic growth pattern is not an easy task and this usually occurs gradually, as the country gains critical mass in terms of investments and productivity gains that will enable it to rely more on exports.
The simple fact that consumption prevails over investments and exports when it comes to economic growth is not something to be blamed, instead the blame should be laid on the country’s chronic lack of capacity to generate consumption goods locally, without having to borrow from abroad. That is why the recovery is progressing in small steps in Romania, but it will probably be much more sustainable than before. Romania will reach its long-term potential in the next two years, but meanwhile it will have to further slash its fiscal deficit to more sustainable levels, while seeking to channel as much of its public funds towards viable projects capable of generating more value added in terms of economic growth.
It is important, however, to mention that, despite the comparatively higher growth rate of exports volume over imports (+13.1% vs. 11.6%), the overall impact of net exports on GDP formation was slightly negative in 2010. To put it differently, Romanian exports lost ground compared to the export activity of its foreign partners in terms of productivity. That is why Romania should make further efforts to attract FDIs in the years to come, since this is the only way of catching up with our regional peers and getting closer to Eurozone standards.
Romania attracted only EUR 2.6bn in FDIs in 2010, which is almost three times less than Poland, a country that is ‘more’ comparable with us in terms of labor productivity. Except for Bulgaria, Romania indeed remains the cheapest country in EU in terms of labor costs relative to average productivity gains, but being ‘relatively’ cheaper is not everything. There are also other key ingredients, such as infrastructure, labor market efficiency, innovation that could stir up foreign investor interest in choosing Romania as a preferred business location, at least in this region.
FDIs to support catching-up with peer countries in the region
This becomes increasingly important as the business environment is changing fast, and resources will no longer be close at hand like in the past. Under the new global context, reverting to previous high levels of external imbalance is far-fetched as is the chance of Romania to grow at similar rates as in pre-crisis. We expect the current account deficit/GDP to hover at an average of 4-5% in the medium term, and this trend should be backed by an increasing absorption of EU funds that will partially substitute the reduced foreign funding that once used to come thick and fast.
Private investment should be at the core of economic growth, while private consumption is likely to maintain a lower profile in 2011. We now see Romania advancing by around 2% this year, but do not rule out the chances of the economy growing a little quicker, if FDIs see a faster recovery and the government presses ahead with the infrastructure project in the second half of the year. After falling by an aggregate 15% in the last two years, agriculture could turn in a positive surprise, while officials from the Ministry of Agriculture look pretty confident that production will be on the rise in 2011. In a moderately optimistic scenario, this could push economic growth up by another 0.3-0.5pp, compared to our base-line GDP.