By BCR Expert’s Column
Current account deficit to remain low
The current account deficit was three times higher in 2Q compared to the previous quarter, due to the significant increase in the trade deficit (4.5 times). The surge in the trade balance can be put down to accelerating imports ushering in a resumption of investments. Also, FDIs were on an upward trend in 2Q against 1Q (1.7x) and this also could signal some positive trend in terms of investments. However, FDIs were disappointingly lower in the first six months (-17% y/y) and this makes us wary about the recovery pace of capital investments in 2011 and even 2012. Net current transfers were up 30% in 2Q (EUR 960mn), with the public sector contributing 58% of the total quarterly growth. It is important to note that private current transfers were down almost 3% y/y in 2Q, showing that Romanians working abroad are still in a pickle.
C/A: As the local economy is likely to trail behind its LT growth potential in 2011 and 2012, while private consumption and investments will see only modest growth rates, the C/A deficit will remain muted. Romania remains a country where faster recovery must necessarily be accompanied by hefty inflows of foreign capital. Under the current less auspicious external circumstances, strong inflows of foreign capital are pretty unlikely and Romania will have to grow mainly under its own steam. EU funds could be a breath of fresh air.
Labor market more flexible after the amendment of the Labor Code
The amended Labor Code, brought more in line with the EU standards, has already produced effects generating more than 190thsd brand new labor contracts in a relatively short period of time (May-June). The new Labor Code came into force in May and will pave the way for increasingly flexible labor market conditions and an enlarged contributor base to the social assistance scheme. According to the National Institute of Statistics (NIS), the payrolls increased by around 54thsd in May-June and this number seems at variance with the number of new labor contracts announced by the Ministry of Labor. In truth, the number of payrolls released monthly by the NIS discounts companies with less than four employees, as well as officers within the military (Ministry of Defense, Interior, secret service etc).
Labor market: Romania is comparatively more attractive than most of its regional EU peers in terms of labor costs relative to average productivity gains, and the new framework will be a good opportunity to consolidate this strength. Payrolls may stabilize somewhat starting late 4Q, as some seasonal activities, such as agriculture and construction wind down. If industry decelerates more rapidly than we expect in 2H, a slight decline in payrolls in late 2011 should not be ruled out. Unemployment could decline slightly to 7.2% in 2011 (7.3% in 2010).