EC upgrades Romania’s GDP growth forecast for 2014 and 2015

By bne IntelliNews May 5, 2014

The EC has upgraded Romania’s GDP growth estimate for this year to 2.5% under its May 5 spring forecasts from 2.3% under its previous forecast released in February 2014. The EC has also upgraded its projection for next year to 2.6% from the previous 2.5%. The country's GDP expanded by 3.5% in 2013 after one-off record high agriculture crops contributed significantly to the growth.

The size of Romania's 2015 GDP is seen 2% above the level expected under the November 2013 forecast and 0.2% above the level expected under the February 2014 forecast. The robust growth demonstrated by the country's economy in the first quarter of 2014, estimated by PM Victor Ponta recently at 3.2% y/y, has generally encouraged the gradual upward adjustments in analysts' expectations.

Domestic demand, particularly consumption, would drive the growth over the two-year period – but the robust performance of exports will keep the current account gap at moderate levels of 1.2-1.6% of GDP [which is actually smaller than projected under the November 2013 forecast]. The fiscal consolidation is expected to continue, even if at slightly slower rates than expected under the previous forecasts. Public indebtedness would exceed the 40%-of-GDP level at the end of 2015. Despite the economic recovery, the employment would grow at modest rates in the coming two years.

GRADUAL ACCELERATION OF GDP GROWTH. The stronger-than-expected GDP expansion last year was partly driven by the outstanding crops in the agriculture. The agriculture’s 1.1pps contribution to last year’s GDP expansion generates high-base effects that might have a negative impact on this year’s growth rate. Corrected for the agriculture's impact, last year's GDP growth was only 2.4% - meaning that the EC expects the country's growth rate to actually accelerate moderately in the coming years.

DOMESTIC DEMAND TO DRIVE GROWTH. After a negative impact on the country’s GDP growth last year [minus 0.3pps], the Commission expects the domestic demand to drive the overall growth with a contribution of 2.2pps in 2014 and 3.1% pps in 2015. Notably, compared to the February forecast, the EC has slightly upgraded its projection on i. Romania’s 2014 exports and ii.Romania’s 2015 domestic demand. Exports continued to perform robustly encouraging such expectations. The external demand is still expected to make a positive contribution to the country’s GDP this year – namely of 0.3pps.

Nonetheless, the bulk of this year’s growth would come from domestic demand, particularly consumption, and not from exports, under the EC’s forecasts.

Private consumption is expected to grow 2% this year and 3% in 2015 – which is an upgrade of 0.5pps for each of the two years compared to the February forecast. Gross fixed capital formation would expand even steeper – by 2.7% y/y in 2014 and 4.3% in 2015, but its overall impact on growth is toned down by the low level of investments. Moreover, the Commission has now downgraded its expectations for the level of gross fixed capital formation from the previous forecast issued in February.

EC Spring 2014 Forecasts - Romania May 2014 May 2014 May 2014 Feb 2014 Feb 2014 Feb 2014 Nov 2013 Nov-13 Nov-13
y/y % 2013 2014 2015 2013 2014 2015 2013 2014 2015
GDP 3.5 2.5 2.6 3.5 2.3 2.5 2.2 2.1 2.4
Private Consumption 1.3 2.0 3.0 0.9 1.5 2.5 0.3 1.6 2.2
Public Consumption -1.8 1.8 1.6 -1.5 1.8 1.5 0.0 1.8 1.3
GFCF -3.3 2.7 4.3 -2.7 3.4 4.5 -2.0 3.5 4.4
o/w, equipment -3.8 2.5 4.5 -2.0 3.5 4.5 -0.3 4.0 4.5
Exports [goods, services] 13.5 6.5 5.6 13.6 5.7 6.3 9.6 5.0 6.1
Imports [goods, services] 2.4 5.9 6.8 2.9 5.0 7.3 0.8 5.1 6.5
Contribution to GDP growth [pps]                  
Domestic Demand -0.3 2.2 3.1 -0.4 2.1 2.9 -0.3 2.2 2.7
Inventories -0.6 0.0 0.0 -0.3 0.0 0.0 -0.9 0.0 0.0
Net Export 4.4 0.3 -0.5 4.2 0.2 -0.5 3.5 -0.1 -0.3
y/y %                  
Employment -0.3 0.4 0.7 0.2 0.4 0.7 0.6 0.6 0.7
% of GDP                  
Trade Balance -2.4 -2.5 -3.0 -2.4 -2.5 -2.9 -2.8 -3.0 -3.3
C/A Balance -1.1 -1.2 -1.6 -1.0 -1.2 -1.6 -1.2 -1.5 -1.7
Structural budget balance -1.7 -1.8 -1.7 -2.1 -1.8 -1.6 -1.9 -1.5 -1.4
General govt gross debt 38.4 39.9 40.1 38.3 39.3 39.2 38.5 39.1 39.5
Source: EC Spring Forecast - May 5, 2014                  

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