Romania’s GDP increased by 6% y/y in Q2 according to initial estimates, the statistics office announced on September 6. The data confirmed the flash estimate announced in August.

The outstanding growth is visibly an effect of the fiscal stimulus, which included VAT rate cuts and public wage hikes.

GDP growth accelerated from 4.3% y/y in Q1, but it is expected to slow down to 4%-5% in the coming quarters. In April, the state forecasting body projected 4.2% growth this year followed by an acceleration to 4.7% y/y in 2019. 

The finance ministry has confirmed that, unless the tax rate cuts scheduled for next year are deferred, GDP might accelerate. However, Finance Minister Anca Dragu has also asked the parliament to take steps towards fiscal consolidation, since the country tends to breach the EU fiscal compact by not targeting a 1% structural budget deficit. The growth rate is already significantly above the potential growth, the central bank has commented.

To the extent the growth is seen as sustainable, the Social Democratic Party (PSD) could in principle gain political dividends. This is because the VAT rate cuts and most of the fiscal stimulus package was enacted during the government of former PSD Prime Minister Victor Ponta. The rival National Liberal Party (PNL) basically agreed with the rate cuts, but voters may remember that half of the party - the Liberal Democrats, who merged with the PNL in 2014 - were responsible for cutting public wages and hiking the VAT rate in 2010.

However, the PSD will probably focus more on the direct effects of the fiscal stimulus package they have enacted - wage hikes and VAT rate cuts - and not primarily on abstract concepts like GDP.

On the utilisation side, the growth was driven as expected by private consumption, which expanded by 10.4% y/y. On the upside, gross capital formation expanded by 8.4% y/y driven by gross fixed capital formation that surged by at a double-digit rate (by 10.6%).

However, outstanding internal demand pushed up imports to a larger extent than the domestic production, and eventually imports increased by 11.0% y/y while the value added generated internally increased by only 6.4% y/y (net taxes increased at a slower rate of 3.1% y/y).

All the economic sectors have generated more value added than last year, but the highest growth in this regard by far was reported in the services sector (wholesale and retail; repair of motor vehicles and motorcycles; transport and storage; hotels and restaurants). The value added derived by this sector, partly due to the high margins achieved thanks to robust demand) increased by 17.2% y/y. The sector contributed 2.1% pp to the overall GDP growth.

The value added generated by industry expanded by 2.6% y/y and the sector’s contribution to GDP growth was 0.6pp. Even agriculture, which seasonally holds a small share in the second quarter’s GDP, contributed 0.3pp to growth due to the outstanding 17.9% y/y rise in the value added.

	Contribution to the nominal value of GDP - %		Contribution to the growth rate of GDP - %
	Q2	First half of the year	Q2	First half of the year
Total final consumption	79.6	80.6	7.6	7.2
Actual individual consumption of households	72.9	72.8	7.5	6.8
Final consumption expenditure of        households	66.0	65.8	7.3	6.8
Final consumption expenditure of        Non-profit institutions serving households	0.2	0.2	0.0	0
Individual final consumption expenditure        of General government	6.7	6.8	0.2	0
Collective final consumption expenditure     of General government	6.7	7.8	0.1	0.4
Gross fixed capital formation	25.2	21.8	2.6	1.6
Change in inventories	-2.7	-1.3	-0.8	-0.8
Net export	-2.1	-1.1	-3.4	-2.8
Export of goods and services	42.3	46.3	1.6	2.1
Import of goods and services	44.4	47.4	5.0	4.9
Gross domestic product	100.0	100.0	6.0	5.2