Romania’s GDP maintains robust 4.4% y/y growth in Q2

Romania’s GDP maintains robust 4.4% y/y growth in Q2
By Iulian Ernst in Bucharest August 14, 2019

Romania’s GDP rose by 4.4% y/y in Q2, decelerating slightly from the record 5% y/y growth in Q1, the statistics office INS reported in a flash estimate on August 14. Construction and industrial growth figures released the same day are bright as well.  The seasonally-adjusted GDP edged up by 1.0% q/q in Q1, after a revised 1.2% q/q performance in Q1.

The robust Q2 GDP figures confirm the improvement in construction activities in the second quarter of the year, compared to the more sluggish performances in Q1, when the growth was driven by private consumption in terms of GDP utilisation, and by the services sector on the formation side.

The industrial output index contracted by 1.7% y/y in Q2, after the already disappointing 0.6% y/y advance in Q1, INS data released on August 14 showed. Given the tight labour market, the decline was expected, though. The sector is supposed to grow rather in terms of value added, rather than volume of production, but only detailed Q2 GDP will show whether this was trhe case. 

The construction sector posted impressive performances in both quarters: the volume of construction works soared by 31% y/y in Q2, after the already bright 12% y/y advance in Q1, INS reported in the same day.

The services sector made an essential contribution to the GDP growth in Q1 (by 3.5pp to the 5.0% overall growth), but its contribution in Q2 remains to be seen when the detailed GDP data is released. Retail sales growth decelerated to 5.4% y/y in Q2 from 8.5% y/y in Q1, an unexpected development given the double digit advance of real wages. Lower retail sales were seen in subdued imports and might also surface in the sector’s smaller contribution to the GDP growth in the quarter — both of these two features boding well for the sustainability of the growth.

Romania’s annual GDP growth rate eased from 5.0% y/y in Q1, the highest annual growth rate in the past six quarters, to 4.4% in Q2, but it remains particularly robust.

The country’s economic growth is expected to converge toward the 3-4% long-term potential during the second half of the year. Independent projections are likely to migrate upward toward 4%, while rising concerns are accumulating in regard to developments next year amid imminent fiscal slippage. The negative impact of the economic slowdown in the euro area this year will be offset by loose fiscal policies encouraged by the electoral cycles at home and unexpectedly dovish stance of the major central banks abroad. But the corrective policies in the coming year might occur at the same time as adverse external circumstances.

International rating agency Moody’s, while affirming the country’s sovereign rating in July, evaluated Romania's potential growth at 4%. But it issued a rather pessimistic forecast for this year: 3.3%.

Moody’s expects that resilient domestic demand will support real GDP growth of 3.3% in 2019 and 3.5% in 2020.

“Romania's economy benefits from clusters of excellence in strategic industries and sectoral diversification,” said Olivier Chemla, a Moody's vice president and senior analyst, and the report's co-author, on a positive note.

The European Commission raised its forecast for Romania’s 2019 GDP growth to 4% in 2019 and 3.7% in 2020 in its Summer Forecast issued in July as well.