Romanian official's warning of recession provokes presidential correction

By bne IntelliNews March 12, 2012

bne -

Finance Minister Bogdan Dragoi warned on March 9 that the country risks sliding into recession in the first quarter of 2012, only to be quickly corrected by President Traian Basescu, in a sign of tensions rising ahead of elections later this year.

Blaming the severe cold snap in February that wreaked havoc across Southeast Europe, Dragoi said that the economy could shrink in the first quarter of 2012 versus the previous quarter. Following on from a 0.2% contraction in the final three months of 2011, that would see Romania join the likes of Spain, Czech Republic and Italy in entering technical recession.

Whilst the government has said that the result from the final quarter of 2011 suffered due to an unusually high base in the third quarter, it also claims that the likely contraction in the first three months of 2012 is an outlier, with the slowdown of business due to harsh winter conditions in February to blame. "The economic decline was prompted by a block in the transfer of goods, but the demand for these goods is there and will come back later in the year," Dragoi said, according to Reuters.

However, following massive protests against austerity in January, the mood amongst government officials is becoming tense, and suggestions of recession - no matter that he tried to couch them with talk of high bases and bad weather - in Dragoi's first press conference in Bucharest since his appointment, clearly do not follow the party line.

President Traian Basescu, therefore, quickly moved to refute the forecast of recession on March 11, newswires report. Wriggling to avoid discussing the recent quarter-on-quarter growth rates, he instead concentrated on the improvement recorded year on year, with Romania recovering from a 1.3% contraction in 2010.

In the fourth quarter of 2011, the economy registered a significant growth compared with the same period in 2010, he said, adding there is no reason for concern about drifting back into recession. As Dragoi pointed out, compared with the first quarter of 2011, growth of 1.5-2.0% is expected in the first three months of 2012.

The Romanian economy grew at an annual rate of 2.5% in 2011. For 2012, the authorities forecast growth of 1.5% to 2%. That allows them to push populist policies ahead of the elections.

However, the figures thus far are less optimistic. According to preliminary data released by the finance ministry, Romania ran up a budget deficit of around RON2bn in the first two months of 2012, or the equivalent of 0.3% of GDP. That's just a shade below the 0.4% reported during the same period in 2011, point out analysts at Erste.

"The main challenge for Romania during the election year," Erste says, "is to stay within the ambitious budget deficit target it has committed to (3% of GDP). Tempers have begun to flare in the run-up to elections and even President Basescu turned to more populist rhetoric asking the ruling coalition to raise public wages by June 1st. Our estimate indicates that a 10% increase in the average public wage (May-December 2012) could generate an additional expense of around 0.3% of GDP. We continue to see a budget deficit of 3.4% of GDP in 2012."

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