Romania’s GDP advanced by a real 2.2% y/y to RON 121.45bn (EUR 27.7bn) in Q1, the statistics office reported. The reading, still preliminary, is a minor upward correction from the 2.1% flash growth estimate released on May 15.

The seasonally-adjusted quarterly growth rate was also adjusted upwards - to 0.7% from 0.5%.

Despite the upward revision of the Q1 GDP data, we expect analysts to tone slightly down their overly optimistic projections for full-year growth rates of above 2% - in response to the detailed dynamics of the GDP in Q1 that shows growth was driven entirely by possibly unsustainable foreign trade items.

The weak performance of the EU funds absorption in Jan-May [EUR 0.7bn against EUR 2.5bn full-year official target] also suggests moderation.

The domestic demand has slightly contracted despite opposite expectations, toning down the optimism generated by the headline GDP performance. The growth was entirely backed by net exports that contributed 3pps to the 2.2% GDP growth. Exports’ performance was not surprising, but the domestic demand’s weakening is slightly disappointing.

Reliance on exports is risky since it is uncertain whether a strong exports' expansion is sustainable, even in medium term.

The FOB/FOB trade gap shrank 54% y/y in Q1, when the country’s CA balance moved in the surplus area for a first time in the past decade. But the performance was largely due to lower energy imports driven by the warm weather. Consumption decreased by 0.2% y/y in Q1 and gross fixed capital formation by 0.7% y/y, the statistics office says. Their contraction contributed a negative 0.2pps and a negative 0.1pps, respectively, to the GDP's annual performance.

Both the government and the EC expect gross fixed capital formation to drive growth in the coming years. The government grounded its forecast for 1.6% full-year GDP growth on strong domestic demand [+1.4% y/y], particularly gross fixed capital formation [up 5% y/y]. The capital formation can still gain ground during the year as investment programmes financed from the EU hopefully resume or start. But under this perspective it means that the bright Q1 performance is not an indicator for similar good performances in the quarters to come.

On the formation side, industry contributed a major 0.7pps to the 2.2% y/y advance of the GDP. The value added generated by industry expanded by 2.6% - still below the 4.7% increase in the sector’s gross output. The wholesale and retail trade, car repairs, hotels and restaurants also contributed 0.4pps to the overall GDP growth, as their combined value added increased by 3.2% y/y.  The sector of support, professional and administrative services advanced by 6.8% y/y, contributing another 0.4pps to the GDP expansion.