Domestic demand-driven growth to strengthen further in 2016
The Romanian economy became one of the fastest growing in the EU in 2015, with real GDP growth accelerating to +3.8%, up from +3% in 2014, thanks to considerably strengthening domestic demand. Fixed investment surged by +8.8% in 2015 (+2.5% in 2014) and private consumption by +6.1% (+3.8 in 2014) while government consumption picked up more moderately by +1.6% (+0.3% in 2014). Inventory destocking subtracted -0.8pps from overall 2015 growth. External demand weakened in 2015, with export growth slowing to +5.5% (+8.6% in 2014) while import expansion remained strong at +9.1% (+8.9% in 2014). As a result, net exports made a negative contribution of -1.5pps to 2015 growth (-0.2pps in 2014).
In Q1 2016, the gap between domestic and external demand widened further. Real GDP grew by +4.3% y/y (up from +3.8% y/y in Q4 2015). Fiscal stimulus measures helped private consumption rise by +9.2% y/y and government consumption by +2.8% y/y. Fixed investment grew by +7% y/y while inventories subtracted -0.6pps from Q1 growth. External demand weakened further in Q1, with exports up by just +1.2% y/y while the strong domestic demand supported the +8% y/y increase in imports. As a result, net exports subtracted -2.8pps from Q1 growth. Euler Hermes expects these trends to continue over the next few quarters and forecasts full-year growth of +4% in 2016, followed by +3.6% in 2017.
Deflation expected to fade in H2 2016
Monetary policy is officially based on inflation target¬ing but, in practice, the National Bank of Romania (NBR; the central bank) also aims at a certain degree of currency stability and, since 2009, attempts to steer credit growth and liquidity. Indeed, the key policy interest rate has been steadily lowered since March 2009, despite considerable inflation volatility until mid-2013.
Since September 2013, headline consumer price inflation has rapidly fallen and has been below the NBR's inflation target of 2.5%±1pp (set at the start of 2013) since early 2014. Moreover, inflation fell into negative territory in June 2015 as a result of the 9pps VAT cut for food. The deflation has deepened since January 2016, reflecting the further 4pps across-the-board VAT cut at the start of the year, and reached a historical low of -3.5% y/y in May.
Well aware that the impact of these one-off tax cuts will wane after a year, the NBR has kept its policy rate steady at 1.75% since May 2015. Going forward, buoyant domestic demand and the May 2016 minimum wage hike should exert some upward pressure on prices. Euler Hermes expects positive inflation to return in H2, reaching about +0.5% at end-2016 and +2% at end-2017.
Exchange rate to remain resilient
The RON/EUR exchange rate has been fairly stable since 2012, fluctuating by just ±4.5% around an average 4.45. The Emerging Markets sell-off in mid-2013 and early 2014 hardly affected the RON – similar to other currencies in CEE. Nonetheless, renewed exchange rate volatility cannot be ruled out entirely with regard to ongoing vulnerabilities in the banking sector and potential political turbulences in the run-up to legislative elections in late 2016.