NBR: Eroded purchasing power, decreasing employment intentions and the visible decrease in GDP dynamics in the first quarter of 2023


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Both the evolution of inflation controlled by the National Bank of Romania – BNR (adjusted CORE 2) and the “consistent” revision of the INS on the GDP evolution in the third quarter upset the expectations of the 9 members of the BNR board, according to the minutes of the discussions, published on Monday.

During the meeting, the Board discussed and adopted the monetary policy decision, based on the data and analyses on current and future macroeconomic, financial and monetary developments submitted by the specialised departments, as well as on other available domestic and external information.

Looking at the recent developments in inflation, Board members showed that the annual inflation rate had reached 16.76 percent in November, exceeding the forecasts, after its fall to 15.32 percent in October from 15.88 percent in September. It was noted that, alongside the pick-up in food prices, a major driver of the hike seen during that period had been the advance in the prices of non-food items and market services, whereas the fuel price dynamics had posted a steeper decline, amid the downward trend in crude oil prices and the firewood price cap, so that the overall contribution of exogenous CPI components had remained disinflationary, the central bank says.

By contrast, the annual adjusted CORE2 inflation rate had posted again a slightly faster upward movement, contrary to expectations, rising from 11.9 percent in September 2022 to 14.0 percent in November 2022. That time round, the advance had been mainly triggered by the non-food sub-component, given almost across-the-board and faster price increases in the non-food and services segments. The evolution could however be short-lived, probably reflecting late or additional cost increases, as well as adjustments in profit margins, in the context of still relatively robust consumer demand, though anticipated to weaken in the near future, several Board members deemed.

Following the analysis, it was agreed that the increase in annual adjusted CORE2 inflation rate had still been ascribable to global supply-side shocks – amplified and extended by the war in Ukraine and the associated sanctions –, but also to the widespread drought in 2022. Their direct and indirect inflationary effects had been compounded in the first months of 2022 Q4 too by the high short-term inflation expectations, the resilience of demand in certain segments, as well as by the significant share of food items and imported goods in the CPI basket.

At the same time, however, it was observed that the dynamics of industrial producer prices for consumer goods on the domestic market had continued to see a slower increase in the first two months of 2022 Q4, amid the steeper decline in the change in durables prices, while short-term inflation expectations of economic agents in industry, trade and construction had resumed their decrease towards the end of last year, after a short-lived stagnation. Moreover, longer-term inflation expectations of financial analysts had witnessed a new downward revision in November-December 2022 overall, remaining however above the variation band of the target, while the dynamics of the average net real wage had remained significantly negative in early 2022 Q4, reflecting the erosion of the consumer purchasing power, some Board members underlined.

As for the cyclical position of the economy, Board members noted that in 2022 Q3 economic activity had expanded at a pace similar to that in the previous three months, i.e. 1.3 percent, considerably exceeding expectations, but amid a notable downward revision of statistical data on GDP dynamics for 2020-2022. It was concluded that the developments made it likely for the excess aggregate demand to pick up again over that period, contrary to expectations.

By contrast, compared to the same year-earlier period, GDP growth had continued to decelerate in 2022 Q3 – to 4.0 percent from 5.1 percent in Q2 –, instead of re-accelerating as anticipated, remaining however significant from a historical perspective. The economic growth had been supported, that time round, mainly by gross fixed capital formation and only to a secondary extent by household consumption, while the contribution of net exports had strongly re-entered negative territory, given that the annual growth rate of imports of goods and services had notably exceeded that of exports thereof in terms of volume. Consequently, trade deficit and current account deficit had posted a considerably faster annual pace of increase in spite of the significant narrowing of the unfavourable differential between the lower annual change in import prices and that in export prices. The magnitude and pace of widening of the external deficit in 2022 were viewed as particularly worrisome by Board members, reflecting, alongside the major impact of the worsening terms of trade – significantly affecting other European economies too –, competitiveness issues across some sectors and companies.

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