Analysis: Growth slows as Romania adjusts to high energy prices and inflation is close to peak


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According to OTP Bank analysts, economic growth is slowing down as Romania tries to adapt to high energy prices and the euro area turns towards stagflation or even recession. The local economic activity is directly affected by another hike in inflation, slowdown of the economic growth and household spending, with an estimated 5% GDP growth for this year.

Considering the economic recovery performance, Romania has performed very well in the first part of the year, accounting the comeback after the pandemic and the reopening of HoReCa. That has its share in the GDP growth, as well as other sectors like Information and Communications which continued to perform. At this point Romania is still in a good position, less influenced by the international gas shortage.

“Romania’s exposure to energy imports is relatively limited in the EU comparison, but the high energy tariffs imply a terms of trade deterioration and later on someone will have to pay the price. At the same time, a quarter of the GDP is very sensitive to the energy price fluctuations, namely industry, transport, retail and HoReCa. Also considering the questionable situation in agriculture, with crops 20-25% below last year because of the drought, we see the GDP growth just under 5% for this year”, said OTP Bank analysts.

The second half of the year economic performance is influenced by the decline in agriculture and also by the reduction of consumer spending, with effects more noticeable during the next year.

“We estimate a 2,5% growth for 2023, with the slowdown being driven by household consumption. We should consider a weaker export performance too, the fact that the industry and all large industrial energy consumers will have a reduced activity, and the year-on-year performance in the service sector is weakening”

So far, inflation continued on its upward path, and after in mid-summer it went above 15%, in September it reached 15,9%. The evolution of inflation during the last period was uncertain, considering the effect of the energy price capping has just appeared in the data, and there were also other influences from the retail goods sector. For now, inflation followed the estimated path, seems to be at peak or close to peak, and after hovering between 15-16% for a few months it should start on the downward trend.

“For September we expected a slightly lower level of 15,4%, we could further expect other food prices shocks, but it is likely that all raw material prices are at their maximum. The trend suggests now a very slow decrease in inflation will follow, remaining in the two-digit zone at least until next spring. If we consider that core inflation, without energy or food, is close to 6-7%, when these prices will drop there will be no reason for Romania to have a high rate of inflation”

In line with the market developments, the central bank continued it monetary policy and has stepped up the base rate hike with another 75 bps, more than the 50-bps market expectation. The central bank will most likely continue on this path and proceed for another increase of the interest rate in November, up to 7%.

“At this point we are not far away from peak interest rates. It is clear that from a steep yield curve just months ago, now we are in a flat position, as the market does not expect for the interest rate to go up much higher”

In the larger macroeconomic picture, employment is still on the rise, and until July – August no deterioration risk were present for the labour market consolidation. With unemployment at a fairly low level, real wages keep lagging behind, declining at a 2-3% rate, which means the market has not been able to keep up with inflation.

“This has immediate effects in the whole economy, it takes a toll on every aspect, and the credit market started to react, with a lower loan origination which is most likely to continue in 2023 because of the economic slowdown”

It’s a situation with a negative impact on public consumption, but the real good news is that the budget deficit improvement has resumed after implementing the expenditure cut measures, and it will likely continue to improve.

“Nevertheless, the current account deficit is still high, but we cannot put this effect all on the energy price. The current account deficit in Romania was already high before the energy crisis, and the effects were limited, as Romania is not a net energy importer”

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