Macro commentary by eToro analyst for Romania, Bogdan Maioreanu
Europe’s latest economic reports are showing an economic growth of only 0.2% versus the prior quarter but an inflation at a new record of 7.5%. This has been undermining the Euro and increases the predicament for the European Central Bank. Euro area Q1 economic growth was worse than expected, as weakness in France and Italy offset some resilience in Germany and Spain, as the Ukraine conflict is impacting the European economies.
The Romanian National Commission for Strategy and Prognosis (CNSP) has decreased the GDP growth prognosis from 4.3% to 2.9% in 2022 and from 5.1% to 4.4% in 2023. The estimated growth in consumption by the population was revised lower to 3.1% from the previous 3.8% in February, before the start of the Ukrainian military conflict. The reasons for the decrease in projections are: the slowdown in European and global economic activity that is also leading to a slowdown in the Romanian economy, the Russia-Ukraine conflict that induced a worsening of trade indicators in the context of high dependence on Russian gas and the emergence of a new pandemic wave in China that will exacerbate supply chain bottlenecks affecting the automotive industry. The positive factors are related to the attenuation of the Covid pandemic and recovery of transportation and hotels and restaurants sector.
According to the eToro Retail Investor Beat survey, 51% of the Romanian investors expect that the local economy will get worse this year. It is an 8% increase compared with the result at the end of 2021. Only 23% think it will get better. 49% of the surveyed Romanian investors expect the Global economy to get worse too.
EU April inflation inched up to 7.5% from prior 7.4%. The champions are the Baltic states, Estonia with 19%, Lithuania 16.6%, Latvia 13.2% and Netherlands with 11.2%. The European Central Bank (ECB) will try to ‘thread the needle’ at its upcoming June 9 meeting, supporting the struggling economy but setting up for some needed interest rate increases, with investors now expecting three hikes this year.
Inflation was driven by the surge in energy and food prices, becoming increasingly broad-based and entrenched. And the commodities prices that are fueling inflation will remain high, warns the World Bank latest report. “The war in Ukraine has dealt a major shock to commodity markets, altering global patterns of trade, production, and consumption in ways that will keep prices at historically high levels through the end of 2024”. Energy prices are expected to rise more than 50 percent in 2022 before easing in 2023 and 2024. Non-energy prices, including agriculture and metals, are projected to increase almost 20 percent in 2022 and will also moderate in the following years.
According to the report, because price increases have been broad-based across all fuels, there is less room now to substitute the most affected energy commodities. Also, the increase in prices of some commodities is driving up prices of other commodities. High natural-gas prices have raised fertilizer prices, putting upward pressure on agricultural prices. The World Bank is considering that the policy responses so far have focused more on tax cuts and subsidies that can often exacerbate supply shortfalls and price pressures instead on focusing on long-term measures to reduce demand and encourage alternative sources of supply.
The Ukrainian conflict and sanctions are also leading to more costly patterns of trade that could result in longer-lasting inflation. It is expected to cause a major diversion of trade in energy. For example, some countries are now seeking coal supplies from more remote locations. At the same time, some major coal importers could step up imports from Russia while reducing demand from other large exporters. This diversion will likely be more costly, the report notes, because it involves greater transportation distances—and coal is bulky and expensive to transport. Similar diversions are occurring with natural gas and oil.
The US economy is also feeling the effects of high commodities prices and the supply chain problems, latest data showing a GDP annualized decrease of 1.4% in the first quarter of 2022. Declines in government spending, inventories and a record trade imbalance weighed on growth. While this decrease triggered some concerns about recession, the report showed that consumer spending was strong, rising 2.7% after inflation, the highest increase in the last three quarters. Analysts consider that this steep decrease in GDP will probably not stop the Fed from doing another interest hike in May.
Despite these predictions, only 19% of Romanian investors that answered to the eToro Retail Investor Beat survey are seeing the increase in interest rates as a threat to their investments. The vast majority fear that international conflict, inflation and the state of the global economy will negatively affect their investment portfolios this quarter.
Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.
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