The Economic Sentiment Indicator (ESI) declined in February to the lowest level in the last two years in Romania, driven by a sharp drop of confidence in industry, according to the latest figures from the European Commission (EC).
The indicator dropped to 102.2 points, a level similar to that recorded in March 2016, down 1.1 points from January. The peak of confidence was reached in May last year when the indicator reached 105.5 points.
Confidence in the economy correlates historically with the GDP evolution, being one of the indicators targeted by investors to weigh the expectations of economic actors.
Confidence in industry, which is the most important part of the indicator, fell to 1.6 points from 2.7 points in January and 3.4 points in December when it reached the highest post-crisis level, as the companies expect a reduction in output and an increase in stocks.
Consumer confidence continued to decline, following the trend started in October last year.
”The recent deterioration in consumer sentiment is the result of higher interest rates, depreciation of the local currency and fiscal uncertainties,” ING analysts show.
They added that the consumer confidence declined further albeit at a slower pace amid an expected deterioration of the financial situation, negative job prospects and lower saving capacity, with a slight improvement in the general economic outlook.
Services – the index’s second most heavily-weighted component – posted an improvement in confidence (+0.6 pp to 11.3 points), driven by better than expected business over the last three months, even as expectations for the three months ahead softened.
At the same time, confidence in the construction and retail sectors was also down in February.
”These sectors saw a pull-back in price expectations as well, likely due to softer consumption. Nevertheless, price expectations for the other components in the ESI continued to grind higher, suggesting more to be done by the central bank to contain the inflation expectations,” bank’s report, signed by Ciprian Dascalu, ING Chief Economist, reads.
Moreover, ESI decreased slightly in both the euro area (by 0.8 points to 114.1) and the EU (by 0.5 points to 114.3), while remaining at historically elevated levels. The fall in EU confidence in the financial services sector was more pronounced outside than inside the euro area.
With soft data pointing south, the risk balance is tilted to the downside for ING above-consensus GDP growth call of 4.7 percent for 2018 versus the 4.1 percent Bloomberg median.
”Moreover, with even more optimistic assumptions behind the state budget plan for this year, it is unlikely that public investments will offset the expected slowdown in consumption. The opposite is more likely,” ING Bank notes.