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Wednesday, March 4, 2009

Is Romania Already Entering Recession?

I don’t have a chart for this post, or anything of the kind, and the reason will become obvious in a minute. Romanian economic growth, the fastest in the European Union in the third quarter of 2008, slowed dramatically in the last quarter, coming in at an annual rate of 2.9 percent, the slowest in more than three years, and down (dramatically) from a revised 9.2 percent in the July-September period, according to data out today from the Bucharest-based National Statistics Institute.

The point is, we have no idea at all of what the quarter on quarter rate of change is, since the data provided by the Romanian Statistics Office is among the worst in the EU, and more comparable to China than an EU state in this regard. We simply do not know at this point what is happening to the Romanian economy, at least in the sort of detail that matters. Not everyone is so happy to stay in complete ignorance however, and analysts at Raiffeisen Bank did do some calculating of their own. In a research note published on 27 February, they estimate likely fourth quarter growth at 3.5% and put this provisional number through their calculating machines. On this basis they come out with the incredible result that, on a seasonally adjusted basis, the Romanian economy may well have contracted by between 2 and 3 percent from one quarter to the next. This is a very large number, and implies the economy has entered tailspin, especially when we remember that the final result was 2.9 percent year on year (ie below the 3.5 percent number they were working with).

The statistical office will release the GDP figures for Q4 2008 on 4 March. The GDP growth rate in Q4 2008 should be substantially below the levels in the previous quarters. Although GDP expanded by 9.1% yoy in Q3 2008, it may expand by just 3.5% yoy in Q4 2008 (in spite of the still large positive contribution from the agriculture). This is because the final months of 2008 were marked by a rapid deceleration of activity in all sectors of the economy (industry, construction, retail sales). In Q4 2008, industry plunged by 10.4% yoy, while the growth rate in the construction industry stood at 16.8% yoy, down from 28.5% yoy in Q3 2008. Also, the growth rate of retail sales decelerated only to 4.3% yoy in Q4 2008, from 17.4% yoy in Q3 2008. According to our estimations, the rapid deceleration in the annual GDP growth rate reflects a contraction in real GDP in Q4 2008 by 2-3% from Q3 2008 (based on seasonally adjusted data).

Going on the data we do have consumption shrank 2.8 percent year on year, while financial activity fell 1.5 percent. Agricultural output, on the other hand, was up 18.2 percent, sustaining growth to some extent. The statistics institute said it will provide a more detailed breakdown of economic growth on March 19, but since Eurostat reports provide no harmonised Romanian GDP data in their quarterly reports, I am not optimistic.

“I am worried,” Finance Minister Gheorghe Pogea told reporters in Bucharest today. “These are the initial effects of the crisis manifesting itself in Romania. I am thinking about how to compensate for this, to re-launch the economy. The amplitude of the slowdown is big.”

Romania’s prior growth was based on a lending bubble. This has now burst. Private lending growth slowed to an annual 34 percent in January, down from over 63 percent in June as overdue debt payments more than tripled. Exports, which comprise almost a third of Romania’s gross domestic product, fell an annual 17 percent in December. So Romania’s economy is being hit on two fronts, exports are hit by economic contractions among its customers, while the credit crunch has put a sharp brake on domestic consumption.

Since it is more or less certain that the Romanian economy contracted in the last quarter of 2008, and since it is more or less impossible that we see an expansion in the first quarter of this year, I would conclude that the Romanian economy has now entered recession.


Cristian Banu said...

Hi Edward,
there are several data avalilable, though. The revenues of the state budget dropped with 8,6% in January and 8% in February. A manager in national electric distribution company was quoted in today's Ziarul Financiar saying that the consumption dropped with 8% in January, 7% in February and 5,6% in first 23 days of March.
Based on this, it is possible that january was the maximum drop, and the speed of deceleration diminished. If the trend continues, it is expected that the reduction of the economy will end in may or june and starting wiht Q3to return on positive side. Considering the fact that Q3 and Q4 account for 60% of GDP, it is well possible that on year to year basis the drop to be less than IMF prognosis of -4%.

Edward Hugh said...

Hello Cristian,

And thanks for the information. I guess those revenue contractions were year on year and not month on month.

"it is expected that the reduction of the economy will end in may or june and starting wiht Q3to return on positive side."

I think this is being very optimistic. At the present time I see no Eauropean country where this is likely to be the case (IE positive growth in H2). So I can't think of any good reasons why Romania should be different. Indeed I can think of reasons on the downside at this point.

We need to get a real measure of the pace of the contraction in Q1 before we can reach too many conclusions. 8% annual contraction rate is not impossible (that is a q-o-q contraction of 2%), and you would be right, this may slow during the year (eg we may get q-o-q contraction of only 1% in Q4) but it is much too early to say.

I think, looking at everything I am looking at, that the IMF estimate may be too small for the contraction. Almost everywhere forecasts are being revised down at present. But to be prudent we should wait and see a bit more.

The weighting towards second half GDP comes from agriculture, I suppose, and again at this point this is rather an unknown, since 2008 was such an incredibly good year (ie high base effect).

Anyway, I am writing a lengthy post - which will go up in parts - now, so maybe this will make thinks a bit clearer.