Welcome to Romanian Economy Watch Blog. Below you will find the conventional chronological blog posts. But first we would like to present some charts which provide background data which we hope will help the first time reader better assess and get to grips with the argument about the roots of Romania's emerging economic crisis which is being presented here.
The data being present here is both conventional and non conventional, and reflects our in house view that demographic components need to be taken alongside more conventional macro-economic ones to appreciate growth dynamics, and in particular in the Eastern Europe context. So, alongside charts for the exchange rate and consumer debt, you will also find charts for Romanian male life expectancy, live births and fertility, out migration to Italy and Spain (based on data from ISTAT and INE) as well as quarterly GDP growth, retail sales, inflation, as well as for the trade and current account balances. Basically we hope you will find this background data useful in assessing the argument which we are presenting on this blog, namely that Romania's demography,as proxied in long term fertility and out-migration rates (there are over a million people missing from the potential labour force due to out migration alone), means that current growth rates, or anything near them, cannot be sustained without provoking continuous inflation, and loss of export competitiveness, the combination of which may well lead to severe macroeconomic consequences. Please click on thumbnails for better viewing.
In the first place we show the recent decline in the
Romanian leu vis-a-vis the euro, together with a chart indicating the growing
non-leu indebtedness of the Romanian population (which of course, makes the risk from a correction in the currency even more significant.
To give an indication of the rate at which this problem is growing, according to data from the Romanian central bank, in October 2007 the nominal value of non-government credit advanced year-on-year by 51.4%, with a 40.5% growth in RON-denominated loans and a 63.3% rise in foreign currency-denominated loans when expressed in RON (expressed in EUR, forex loans expanded by 72.4 percent).
Next on the left there is a chart for quarterly GDP growth The Romanian economy has been growing strongly, although not excessively, in recent quarters, but what is driving this growth? On the right you can see the rapid acceleration in retail sales since the middle of this year. This expansion in domestic consumption is in part produced by a strong inflow of remittances the large number of Romanians who are now living and working abroad.
On the left you can see the number of Romanians who have residence in Italy according to ISTAT, and on the right you can see the equivalent number for Spain according to the INE. Exact figures for the total numbers of Romanians abroad are impossible to come by (which makes it impossible to calibrate anything resembling a NAIRU for Romania) for the simple reason the the Romanian authorities do not attempt to obtain an accurate measure as can be seen from the official migration statistics included in the chart on the right.
Next on the left we have a chart where you can see the recent acceleration in
Romanian inflation while on the right we can see the upward movement in
wages and salaries.As strong growth continues and labour capacity constraints are hit, due to the declining quantity and quality of labour which remains, a critical point is reached when wages and retail prices start to rise rapidly.
Here you can see on the left the consequences of this dynamic for the Romanian
trade balance and on the right the correlate of this for the
current account deficit. As domestic prices rise, imports become cheaper and get sucked in in ever larger quantities while exports get more expensive and export growth slows.
On the left are the annual numbers of live births - which is really what matters from a labour supply point of view. This has been dropping since the late 60s.Then you can see Romanian male life expectancy, which is compartively low, and this is a big complicating factor in raising participation rates among older workers to replace those who have either left or simply not been born.
2008 Forecasts:Consenus Economics are forecasting economic growth in Romania of 6.3% for 2007, and a slightly slower 5.7% for 2008. The number for 2007 seems about right, although the final reading may even be slightly higher given the governent fiscal stimulus during the second half of the year, while the number for 2008 may be rather on the high side, depending on the pace and extent of the slowdown. Really everything here hinges on whether Romania has a soft or hard landing, and when. My own feeling is that the landing will be a hard one, but the timing is very hard to foresee, and it is the timing which will have the greatest influence on the final outcome. As long as things continue as is, then the consensus forecast looks about right, but will things continue as is?
The IMF in their October World Economic Outlook came in with a similar figure of 6.3% for 2007 and 6% for 2008, the Economist Intelligence Unit is forecasting growth in the 5 to 5.5% range for 2008, while the EU Commission put the figure at 5.9% in its November forecast.More interestingly the Commission sugest that this rate is achieveable without producing any significant reduction in the unemployment rate (currently officially around 7% on ILO methodology), which suggests they feel it can mainly be achieved by increasing participation rates, and redeploying labour from non productive to more productive sectors. But - as in Poland, where a large number of citizens are also known to be working abroad - it is very hard to know what credence to give the official unemployment data. Certainly a number of Romanian ministers have been very vocal in recent weeks stating that Romania has an urgent need for anywhere between 500,000 and 1 million workers.
My own view is rather more downside than all of this. A lot really depends on factors outside Romania's control, and internally the party can obviously continue for as long as it is allowed to. One limit point may well be the ability of Romanian citizens to continue contracting debt at this rate. It is noteable that despite the strong inflow of remittances and the inflow of bank funds for credit purposes the leu has been sliding. Should the appetite for credit inside Romania start to dry up, or should changed credit rules force it to, then pressure on the leu may become very strong indeed.
Another limit obviously exists on the labour supply front. The IMF put Romania's growth rate at between 5 and 6% in their 2006 annual staff report, and they did this, interestingly enough, by attributing a negative (-0,2%) component to labour supply in a growth accounting study. So they are expecting the growth to come from an injection of capital and TFP. But this is where macroeconomics gets to be a funny business, since much of the growth which actually takes place in modern economies is quite labour intensive, and without that labour relative prices get out of line, and the impact of this mis-alignment is a brake on growth. So basically I would say here that the proof of the pudding is going to be in the eating. If Romania had the labour force to complement its aspirations, then I would say 6% growth would not necesssarily constitute overheating, but under the circumstances it may well do.
If I have to put a number on anticipated growth in Romania next year - and that is what forcasts are all about isn't it - then I would go for something in the 3 to 3.5% range, depending on how far we are into the year before the brakes are actually slammed on. That is we may well see growth continuing during Q1 at a pace which is not much slower than the present one, but from there on in things will in all likelihood start to complicate themselves, the only real outstanding question being, I feel, how far and how fast?/p>
2 comments:
if the trend in leu devaluation compared with the euro continues this will bring a lot of suffering to the Romanian economy. And it is very likely to continue as the main force taht made the leu stay strong in the last 5-7 years has been the foreign investment and remittances. as the world markets are going through a credit crunch and investor appetite for risk is significantly diminished the foreign investment may dry up. the main sources for remittances are now the Romanians in Spain and Italy. If these economies go into recesssion ( and it seems they are heading that way) this source will also diminish. some may decide to return to Romania which may help local economy and to keep inflation in check. on the other hand those that will remain ( likely the ones who have integrated more in the new country) will likely devote less of the revenue to the relatives in Romania.
making an assuption that Romanian immigrants will behave similarly with the Mexican immigrants in the US we can expect that as time goes by less and less will be sent home to support the local currency. the Mexicans who emigrated more than 10 years ago are sending less money back home than the ones who immigrated within the last 5 years even though they are very likely to be making more. they are more likely to have their families with them, their kids in American schools and to be more engaged in following their own American dream.
so it may come to the point where the value of local currency will depend more on the local economic performance than on transient factors. this is where we come to the chronic problems of the Romanian economy: corruption, lack of intelelctual property rights enforcement and labor market rigidity and shortages. the social contributions that are already quite sizeable will only grow as active population decreases and the number of retirees will continue to climb. there is no plan of attracting more of the 55 to 70 year old people back into economy and culturally the mood is against this.
Hi Hoosier,
By and large I agree with what you say, so this comment is a bit easier for me to respond to than some of your other ones :).
"as the world markets are going through a credit crunch and investor appetite for risk is significantly diminished the foreign investment may dry up."
This is the basic point I have been arguing on this blog since the summer. My feeling is that this correction is now near, very near.
The Dollar-euro has been going now this way, now that, over the last few days, in a clear indication (IMHO) that investors don't know what to do next, or exactly where to run for cover.
Another indicator would be the steady change of direction in some central european stock markets - the Czech republic and Poland would be two good examples - and this has dragged Austria in its wake, not surprisingly, since Austria has most of the CEE banking and financial services in its basket.
"the main sources for remittances are now the Romanians in Spain and Italy. If these economies go into recesssion ( and it seems they are heading that way) this source will also diminish."
This is the other half of what I have been arguing. Italy has possibly already (in Q4 2007) gone into recession. The Bank of Italy revised the 2008 forecast down to only 1% earlier this week, and even this may now be optimistic.
I am in Spain, and of cousre since Spain had probably the fiercest property booms, it is now one of the(if not the) most severely affected. The slowdown is rapid and dramatic here (as it probably is in Ireland). So yes, the migrants are going to have a problem, since they have the most fragile employment.
They will have a real difficulty knowing what to do if Romania blows at about the same time as the problem deepens here. I expect to see a lot of frantic and desperate coming and going up and down the motorway.
Also what you say about Mexicans in the US is very much to the point here, both in terms of how the remittances flows can reduce during a downturn in the "host" country, and in terms of the longer term attitudes of the migrants. However, since many Romanian migrants do have elderly parents - and few brothers and sisters - back in Romania, we may expect these bonds to hold up rather more in the longer term than they do in Mexico (either that with money going over a longer period, or if the migrants manage to establish themselves adequately in their new country bringing the parents to live with them). Really, Spain's future and Romania's are now very much intertwined here, and nobody really knows what is going to happen next.
I just want to say that I consider all this such a tragedy, for a country which has had such a hard time of things in the past whichever way you look at it (and this goes for the whole EU10). But unfortuantely, as you say in another comment, life is life, and the most important thing would be to try and rescue a discourse out of the ruins that bore some relevance to the nature of the problem. And this applies to Brussels and the World Bank/IMF just as much as it does to local politicians in Bucharest.
I think the first - and actually quite liberating - step would be to recognise that what is happening is happening. Then you can begin the search for solutions.
People are, bit by bit, starting to wake up.Stefan Wagstyl had a piece in the FT yesterday that I have put up in my notebook. He talks of the need for a migration policy, and even in veiled terms about a population one, but he still can't really bring himself to mention that horrible word "fertility". However, progress is progress.
Of course, in the short term all of this is only likely to add to the nervousness of investors, but in my view this is going to happen anyway, since the labour shortages issue is just going to make wage inflation impossible to contain (watch out for what happens next in China on this front). That is high growth and low inflation are going to be impossible to achieve at one and the same time. Of course, if the change in lending conditions also affects Romania, and external credit gets harder to come by while the Bank of Romania continues to tighten inflation will gradually cease to be a problem, since growth will slow (especially if the flow of remittances drops of at the same time) and you will be somewhere near to were Hungary has been for the last 12 months or so: ie in a severe form of stagnation.
The problems here are big, and challenging, but they do not get smaller by being ignored.
Please stick around and continue commenting, as obviously as this turns critical it will be interesting to have some sort of forum and debate. Emil - who often comments here - doesn't agree with me on much of this, but he is watching, and he is thinking, and I personally feel talking about things helps clarify the mind.
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