Romania rockets to the top of CEE's thrusting recovery

By bne IntelliNews February 17, 2014

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Central and Eastern Europe took a huge stride in its economic recovery in the fourth quarter of 2013, according to flash estimates on growth released on February 14. Amid a raft of strong data however, including an impressive acceleration in the Czech Republic, Romania stood out with GDP growth of 5.2%.

It was Romania's strongest quarter in five years, and pushed the country towards a full year expansion of 3.5%. The Czech Republic meanwhile swung from a 1.2% decline in the third quarter to expansion of 0.8%. It wasn't all plain sailing; Poland disappointed slightly at 2.7% year on year. However, analysts at Commerzbank are still happy to call the country's progression over the last 12 months "a fine portrait of economic recovery".

Romania however stood head and shoulders above the rest of the EU, with the Baltics - who have dominated the bloc's top spots for GDP growth over the past couple of years - some way behind. The Latvian and Lithuanian economies however still both expanded 3.3% through the quarter, as fiscal consolidation and structural reforms continue to boost competitiveness.

Agriculture played a large part in the Romanian progress, and some analysts say they expect domestic demand to have had its say, but it's the wider implication that the country's improved competitiveness has seen it plugged into EU supply chains that lends the real optimism. "[E]xternal demand ... most likely remained the main growth driver in 4Q, as in all of 2013," suggests BCR.

"Romania continues to bask in the limelight as the market's darling, having successfully implemented successive IMF reform programmes which have boosted competitiveness," Standard Bank notes. On top of the improvements in the real economy, inflation has backed off, dropping to an all-time low of 1.1% in January, and the large investor appetite for Bucharest's $2bn sovereign bond last month illustrated the confidence in the revived economy and strengthened fiscal consolidation.

Sting in the tail

However, there could be a sting in the tail. The obvious question to ask is what Romania is doing right that Bulgaria - which managed a quarterly rise of just 0.4% - is not. The easy answer is that it has enjoyed a strong reform minded government rather than a political logjam. But that might not last too much longer.

Romania's ruling alliance that has shepherded reform over the last couple of year looks at risk of coming to an end. With the leading Socialist Party apparently seeking to oust its Liberal Party partner, a break down is thought likely. November's presidential election is seen as the ultimate hurdle for continuing the cooperation, but ING Bank talks of "good risks that the alliance will be split over the coming days and a new one installed quite quickly."

That, alongside uncertainty over the level of domestic demand and stability of agricultural input, suggests Romania's time in the sun could prove short. "We see the local economy easing its growth to around 2.3% in 2014, as more evidence is needed in terms of the domestic demand recovery (monthly sentiment indicators are pretty soft)," writes BCR. "Industry and exports will continue to underpin the economic advance, but agriculture may come up short of last year's benchmark, as it still displays highly erratic behavior from one year to the next."

"In spite of the positives," they add, "we believe the ensuing political uncertainty coming from a change to a socialist-led fragile majority government would darken the fiscal outlook and push the RON weaker."

Analysts suggest meanwhile that the Czech recovery provides a clearer picture of a solid, longer term recovery. "While the full breakdown is not yet available for Q4," they admit at Commerzbank, "improving business confidence is driving fixed investment activity as well as inventory accumulation. Such positive developments mean that we may soon look to revise up our 2014 growth forecast from 2% towards 2.5%."

The same analysts suggest that overall, the CEE recovery looks set to persevere. "Leading indicators ranging from PMIs to the German Ifo and German GDP data accurately anticipated CEE manufacturing trends; there is no sign yet that things are coming to an end. January PMIs were particularly strong."

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