EU woes and snow plunge Romania into technical recession

The economy shrank in two consecutive quarters, dragging the country into technical recession. However, analysts say it will rebound in the second quarter, boosted by a partial wage recovery in the public sector and an apparent improvement of the Euro zone economy, although the domestic currency, the RON, continued to weaken.

GDP shrank by 0.1 percent in Q1, according to a flash estimate from the statistics institute (INS), adding to a 0.2 percent decrease in Q4 2011. However, the economy grew by 0.3 percent (gross value) and 0.8 percent (seasonally adjusted value) year-on-year in Q1. The Euro zone economy remained flat in Q1, after having shrunk by 0.3 percent in Q4 2011, and the EU 27 performed similarly, according to Eurostat, the EU statistics office.

Analysts said the local economy had dipped due to lower demand in the EU for Romanian exports and the bad weather that engulfed the country in the first two months of this year, closing roads and slowing down economic activity. However, the economy should return to growth in the second quarter fueled by an 8 percent increase of wages in the public sector this June and the return of social contributions to pensioners through to 2013, after they were ruled unconstitutional earlier this year.

“The economy could return to growth if the industry sector is boosted by external demand,” said Dan Bucsa, chief-economist at UniCredit Tiriac Bank. He added that the impact of a good harvest in 2011 did not disappear by excluding the seasonal component in GDP. “Excluding agriculture, GDP grew in Q4 2011 against Q3 2011, and in Q1 2012 against Q4 2011, although it was a slow growth,” said Bucsa.

Talk of technical recession is premature as both quarterly falls were prompted by external shocks, according to Mihai Patrulescu, economist at Bancpost. “Low temperatures and heavy snowfalls took their toll on infrastructure and resulted in a broad-based decline of economic activity,” said Patrulescu. “Industrial production, construction and retail sales were all affected.”

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“We witnessed a brutal correction in consumption from the previous years and we may see it go up by 2 percent in 2012,” said Melania Hancila, head of the research and strategy department at Volksbank.

Florin Eugen Sinca, analyst in the macro research and fixed income securities team at BCR, said the economy will return to growth in the second quarter as household consumption will go up due to the public sector wage recovery, but infrastructure will also be more prominent.

“We might witness an increase of infrastructure investment, as building works on major projects are advancing, including with the use of EU funds,” said Sinca.

Liviu Voinea, state secretary in the Finance Ministry, said last week that Romania has significant chances to exit technical recession, as the next three quarters will bring back growth due to the improved financial situation of public sector workers and pensioners.

Patrulescu said the outlook for Romanian exports has been improving slightly as the Euro zone economy performed better than expected, and this should help the economy to bounce back.

Romanian exports fell by 0.4 percent year-on-year in Q1 to EUR 10.9 billion, while the trade deficit widened to EUR 1.7 billion. The share of exports to EU members represented 72.4 percent of all trade.

The Ponta government announced last week that a EUR 1 billion credit line from the World Bank will be available from June. The loan will act as a buffer and may be used to cover the budget deficit, which is expected to reach 2.3 percent of GDP this year. The loan has a similar regime to the EUR 5 billion stand-by agreement with the IMF, European Commission and World Bank, and Romania has the option to draw funds only if it needs them.

Analysts surveyed by BR predict the economy will grow by around 1 percent this year. The European Commission estimates in its spring forecasts that Romanian GDP will grow by 1.4 percent in 2012, accelerating to 2.9 percent in 2013. Meanwhile, the IMF expects the local economy to grow by 1.5 percent in 2012.

The Romanian currency continued to weaken against the Euro last week, but other currencies in the region lost more ground. The EUR/RON rate stood at 4.4433 on May 16, losing 0.2 percent since the start of the week, although it began to pick up towards the end of the week. The RON has lost 0.6 percent since the start of May. BCR estimates the EUR/RON will remain in the 4.4 band for the rest of 2012.

Ovidiu Posirca