Romania GDP Q1 2008 (Preliminary)

Romania's economic growth accelerated more than economists expected in the first quarter of 2008 as credit growth and rising wages boosted consumption, threatening to push up inflation even further.

Gross domestic product grew at an annual rate of 8.2 percent in the first quarter, the fastest pace since the third quarter of 2006, according to the latest data from the Bucharest-based National Statistics Institute. This compares with 6.6 percentrate in the fourth quarter of 2007.




The rate of growth in the Romanian economy - which is the second-fastest after the 8.6% achieved in Slovakia among the 20 European Union members that have so far released first-quarter reports, may well drive up inflation even further despite the best monetary policy efforts of the central bank. Consumer prices rose a two-year high annual 8.6 percent in April.




The central bank, which raised its main interest rate five times since October, has warned that inflation may not slow until the third quarter.The Banca Nationala a Romaniei has raised its Monetary Policy Rate to 9.75 percent currently from 7 percent eight months ago and next meets to decide on the rate on June 26.



The leu gained as much as 0.8 percent to 3.5984 per euro, the strongest since April 29, and was at 3.6024 at 11:29 a.m. in Bucharest, from 3.6257 on May 30.

First quarter was described last month as "the best for the Romanian economy in modern history'' by Finance Minister Varujan Vosganian who attributed the phenomenon to rising wages, increased tax collection and growing foreign investment.

Net wages grew at an annual rate of nearly 18 percent in March while household debt has been surging at around 64 percent year on year.

In April 2008 non-government credit in Romania was up by 2.5 percent from March (or 2.0 percent in real terms), and reached RON 168,734.1 million according to the latest data from the national bank. RON-denominated loans were up 3.4 percent (2.8 percent in real terms) and foreign currency-denominated loans rose by 1.8 percent when expressed in RON and by 3.2 percent when expressed in EUR.

At end-April 2008, non-government credit was up year on year by 64.4 percent, or 51.4 percent in real terms, on the back of the 44.5 percent increase in RON-denominated loans (33.0 percent in real terms) and the 85.8 percent advance in foreign currency-denominated loans expressed in RON (when expressed in EUR, forex loans expanded by 68.2 percent).





RON denominated household credit was up by 42% year on year in April, while household foreign currency-denominated loans were up at an annual rate of 137.7%. The rate of increase in these latter has slowed a little in recenent months from the peak, so the whole process may now be slowing. We will have to wait and see.


Romania's unemployment rate fell in April as farmers and construction companies boosted seasonal hiring because of favorable weather conditions. The unemployment rate fell to 3.9 percent in April from 4.2 percent in March, according to data from the National Labor Agency. Unemployment fell from 4.5 percent a year earlier.





Romania's jobless rate has been falling steadily since last year when it joined the European Union, increasing investment in the nation of 22 million and allowing many Romanians to emigrate to find better-paying jobs in other EU nations such as Italy and Spain. A growing labor shortage and a booming construction industry has helped boost average net monthly wages in Romania by an annual 17.7 percent in March.



Retail sales expanded 11.2 percent from a year earlier, government tax collection rose 44 percent on the year, the construction sector grew 32 percent and increasing job offers lowered unemployment to 3.9 percent.




Vosganian also indicated that the government expects a large agricultural harvest this year, which may further accelerate growth. A drought last year destroyed a third of Romania's crops, shaving more than a percentage point off GDP growth last year, according to government estimates. Romania's statistics institute will provide a detailed breakdown of first quarter economic growth on June 5.

Romania Unemployment and Wages April 2008

Romania's unemployment rate fell in April as farmers and construction companies boosted seasonal hiring because of favorable weather conditions. The unemployment rate fell to 3.9 percent in April from 4.2 percent in March, according to data from the National Labor Agency. Unemployment fell from 4.5 percent a year earlier.




Romania's jobless rate has been falling steadily since last year when it joined the European Union, increasing investment in the nation of 22 million and allowing many Romanians to emigrate to find better-paying jobs in other EU nations such as Italy and Spain. A growing labor shortage and a booming construction industry has helped boost average net monthly wages in Romania by an annual 17.7 percent in March.


Romanian labor costs rose in the first quarter from a year earlier. Labor costs for employers, including taxes and social contributions, rose 19.5 percent in the first quarter from a year earlier, although they fell 1.7 percent from the fourth quarter of last year, when employers paid holiday bonuses. I think it is quite clear from the chart (see below) that Romanian wages spiked in the last quarter before enetering the EU and that the pace of increase has been slowing steadily ever since. Basically the real value of these increases is also reducing as inflation has risen, so the sum total of all this is that we should expect economic growth to continue to slow, although we need to remember that the pace of borrowing can also offset this slowdown to some extent in the short term.

Romania Inflation April 2008

Romania's inflation rate remained at a two-year high in April as wage increases and a lending boom spurred consumption and a weaker leu increased many services prices. Inflation was an annual 8.6 percent last month, the same as in March, the National Statistics Institute INSSE said today. Consumer prices rose 0.5 percent on the month, down from a 0.7 percent month on month increase in March.




A drought that destroyed a third of Romania's crops last year continued to pressure food prices in April while rising lending and wages prompted Romanians to shop more. The leu's decline against the euro also raised prices of services such as rent and mobile phone bills that are measured in euros. The leu has weakened 11 percent against the euro in the past year.


In March, net wages rose an annual 17.7 percent and household debt rose an annual 66 percent.






Perhaps even more importantly Romanian producer prices continue to accelerate, and the annual rate reached 15.6% in March, which means there is plenty of evidence of "second round" effects now building up in the pipeline.



Mugur Isarescu, governor of the Banca Nationala a Romaniei, has predicted that inflation will end the year at an annual 6 percent, above the bank's inflation target of between 3 percent and 5 percent. The bank also missed its 2007 inflation target of between 4 percent and 6 percent as consumer prices increased by 6.6 percent in 2007.

The central bank raised its Monetary Policy Rate a quarter of a percentage point to 9.75 percent on May 6 to fight inflation. It has raised the rate at every policy meeting since October, when it was 7 percent. The board next meets on June 26.



It's a little bit early to be drawing any strong conclusions here, but retail sales did slow noticeably in March - rising at an annual rate of 11.2%, down from February's 23.5% - and if we look at the chart below we could get the impression that the "great wave" may now be over. What we will now be likely to see - if what has happened in the Baltics is anything to go by - if a steady slowing in the economy, even as inflation continues to push upwards. By the look of it there may be a six to eight month lag (or slightly more) before movements in the producer price index hit the CPI.

Romania Household Forex Borrowing March 2008

According to data from the Romanian central bank, household borrowing in euros continued to rise in March.


Total credit (including the coporate sector) was up by 66.3% year on year. Household borrowing in RON was up by 43% while household forex borrowing (mainly euros) was up a massive 140.3%. This latter number, large as it seems, was actually down slighly y-o-y from the 142.3 % registered in February and the peak 143.4% in January. The monthly rate of increase - 3.4% - was the lowest in at least a year, and again is well down from the 14.2% m-o-m peak hit in August 2007.




So in fact this may all now be slowing slightly, and it is not clear why, since of course euro denominated loans are not affected by the interest rate changes in the Romanian central bank. Perhaps the general expansion is losing momentum, but we need to wait and see some clearer signs in the real economy data before reaching this kind of conclusion. Certainly there may be some sort of tightening in credit conditions going on after all the IMF and other warnings. The real question is what is going to happen about the current account deficit once the borrowing which is attracting the funds to plug the whole really slows down.





In a not entirely unrelated piece of news the Romanian Statistics Office announced today that the construction production index rose in March at an annual rate of 32.9%.

Romania Central Bank Raises Interest Rates

Romania's central bank raised its main interest rate, already the highest in the European Union, by a quarter of a percentage point again today after inflation accelerated to a two-year high. The central bank raised the rate to 9.75 percent from 9.5 percent, effective from tomorrow.



The Banca Nationala a Romaniei has raised its Monetary Policy rate at every meeting since October, when it was 7 percent, as rising global food and fuel prices and a weaker currency spurred inflation, which accelerated to 8.6 percent in March.

The central bank board today also left its minimum reserve requirements on commercial bank deposits at 40 percent for foreign-exchange deposits and 20 percent for deposits in lei. It also set its next rate decision date for June 26.

``Annual inflation is likely to temporarily remain above the upper limit of the variation band around the target in the following months,'' the central bank said in a separate e-mailed statement today. Inflation pressure in recent months stemmed partly from ``a substantial increase of incomes and continued acceleration of expansion in credit to the private sector.''

Central bank Governor Mugur Isarescu, who targets inflation of between 3 percent and 5 percent this year, has predicted year- end inflation of 5.9 percent. The central bank missed its 2007 inflation target of 4 percent, plus or minus one percentage point, as consumer prices surged an annual 6.6 percent.