Romania’s GDP increased by 5.9% y/y in Q2, the statistics office announced on September 5, confirming the flash estimate issued on August 16. 

More granular data showed industry had the strongest contribution to GDP since before the 2008-2009 recession but, on the downside, the contribution of net exports turned negative after three quarters of positive values.

GDP in comparable prices increased by 5.1% y/y in the four quarters ending June 2017, compared to 4.5% one year earlier.

While the improvement in external conditions could sustain the record growth seen in Q1-Q2 in the future (though surprisingly external demand had a negative impact in Q2), the domestic fiscal stimulus remains the main driver, generating at the same time concerns related to sustainability and predictability. In fact, the intensity of the fiscal stimulus proved stronger than expected in Q2 (in the light of the negative impact of external demand). 

At this moment, the government’s 5.2% target for this year’s GDP growth looks realistic and it might actually be exceeded but at the cost of the accumulation of twin deficits. In this regard, the lack of a predictable fiscal policy remains the major threat to growth.

As regards demand, actual final consumption accelerated to 6.9% y/y in Q2, from 6.7% in Q1 and 6.0% y/y in Q4. This is visibly the main demand driver, fuelled by the public income policies,, but also by the tight labour market and robust performance of the real sector. Gross fixed capital formation (GFCF) advanced by only2.4% y/y, but this is an improvement from the negative dynamics in the past three quarters. The positive growth is attributable, however, to low base effects, as the GFCF remained at a moderate level (23% of GDP, the weakest value among all second quarters in the past decade). 

As regards the external demand, the economic recovery in the European Union has surprisingly failed to stimulate the country’s exports, which increased by only 6.9% y/y after double digit rates in the previous two quarters (10.9% y/y in Q1 and Q4 each).

On the GDP formation side, industry performed a strong 7.7% y/y real increase, accelerating from the already robust 6.8% y/y growth in Q1. The sector contributed 1.8pp to the GDP growth in the quarter. But the largest contribution was made by services: 3.8pp, after the 6.5% y/y advance of the value added generated in the quarter. The information and communication services generated 10.5% more value added while B2B services expanded by an impressive 11.4% y/y in value added terms as well. The B2B sector increased at double digit rates for the fifth quarter in a row.