Feeble consumption undermines sustainable growth perspectives

Exports and agriculture posting similar results to last year and ensuring economic and political stability are key ingredients in repeating last year’s performance. But in order for this to be the beginning of a sustainable growth cycle for the local economy, consumption has to go up and structural problems must be addressed, pundits told BR.

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Simona Bazavan

“In 2014 we will probably witness a slowdown of the economic growth rate, as in the best case scenario agriculture will make a neutral contribution and in the most probable scenario it will make a negative one. At the same time, consumption is unlikely to give a significant boost to economic growth given that wage and credit growth will remain low and the public sector still has areas to be restructured,” Radu Craciun, chief economist and director in financial markets research at BCR, told BR. And he is not the only one cautious about making predictions.

Indeed, the European Commission’s forecast for the local economy is that it will expand by 2.3 percent in 2014 and 2.5 percent in 2015, largely fueled by domestic consumption and investments.

This comes after the 3.5 percent GDP increase Romania posted last year – according to preliminary data – was the highest in the European Union, surpassing all predictions. Everyone agrees that the main two factors behind this were the good agricultural year and the hike in exports, especially those of industrial products. The latter factor in particular was responsible for the unexpectedly high level, Flavia Matei, senior consultant at Ensight Management Consulting, told BR.

“Without the evolution of the agriculture sector, GDP growth would have been about half, and if we set aside the contribution of exports, growth would have been virtually nil,” added Bogdan Belciu, partner, management consulting, at PwC Romania.

Local economic stability and the fact that overall, emerging markets enjoyed a boost of confidence in 2013, also helped, thinks Laszlo Diosi, CEO of OTP Bank Romania. And it is worth considering the poor results posted in 2012, which make last year’s improved performance less surprising, believes Sergiu Negut, managing partner at Mindit, associate dean at the Maastricht School of Management and angel investor.

Given all this, is there any chance the scenario will repeat itself this year?

Craciun believes this depends on several factors, chiefly the development strategy of several large investors present in Romania such as Ford, the evolution of the EU economy and the capacity of Romanian firms to identify new export markets.

While Romania’s agricultural performance is almost entirely weather-dependent, local companies remain proactive in finding export opportunities in order to counteract the decrease or stagnation of consumption on the domestic market, meaning exports will most likely post a similar performance to last year’s. “From this point of view, we have very good signals from the European Union. Things have begun to improve visibly there, and this creates a positive effect on emerging markets. So I think 2014 is very likely to repeat the positive results of 2013, perhaps with improvement on certain segments,” Diosi told BR.

The setting up of local service outsourcing centers is another form of export that is increasingly popular due to cheap labor and a permissive labor code, Negut told BR. However, this provides a limited window of opportunity that Romania needs to take advantage of, he warned.

On the other hand, Belciu believes that further export growth will be organic. With Romania having benefitted over the past few years from the relocation of production to lower cost destinations, he now “doesn’t see a sustained flow of new investments”.

The beginning of a new growth cycle?

“What the Romanian economy needs to return to sustainable growth is consumption picking up, for which several premises are very important: increasing consumer confidence which rests on political and economic stability and predictability, tax incentives and the resumption of crediting activity – in a controlled manner,” he added.

Consumption was showing signs of improving at the end 2013; however, it is too early to say if this is the beginning of a consistent trend or the usual end-of-year shopping euphoria. Pundits remain cautious at best. And even if demand does indeed go up, some of the projected tax increases could counteract this. “The expected growth in domestic demand might lead the Romanian economy to post a similar performance to 2013, although it may be offset by the increase in energy prices or increase in fuel excises scheduled for April 2014,” said Matei.

One thing remains beyond all doubt – Romania is nowhere near the pre-crisis period when economic growth was fuelled by skyrocketing consumption, albeit much of it supported by mass credit.

“We are not in such a scenario as the evolution of consumption is extremely anemic and economic growth stems instead from elements of conjuncture,” said Craciun, while Diosi believes the recent growth is the natural result of adapting to a completely different dynamic than the pre-crisis one.

Agriculture and industrial production remain important growth sources which need to be consolidated this year, but better use should also be made of other sectors such as energy and construction, he added.

At the same time, Romania needs to focus on attracting more foreign investments, especially considering that local capital is limited and financing remains difficult, said Belciu. “For this to happen, political and economic stability and predictability are again required, along with tax incentives, infrastructure, a skilled workforce and improving productivity, he concluded.

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