Romania’s economy slows down: successive drops in GDP in Q1 and Q2

Following last year’s performance when Romania’s gross domestic product grew beyond expectations, the provisory data published by Eurostat and further confirmed by the National Institute of Statistics moderates the optimism about the domestic economy which recorded two consecutive drops of the GDP. Romania entered, therefore, in technical recession, as the GDP declined by 0.2 percent in Q1 2014 over the previous quarter and by 1 percent in Q2 2014 compared to Q1, respectively.

The negative growth corresponding to the first quarter this year contradicts the initial results released by the INSSE which announced an improvement by 0.1 percent over Q4 in 2013.

The root of economic contraction is the reduction of investment both local and of non-residents which were impacted by the fiscal measures introduced by the government, such as the tax on special construction or the additional excises on fuel.

“This was due to the contraction of productive investment which has not been offset by a recovery in private consumption (...) In the first half of 2014 the domestic economy has faced a divergence between the investment climate in the real economy and the one in the financial economy amid the macro-financial external environment, the crisis in Ukraine and the public investment policy adopted by the State”, explains in a report Andrei Radulescu, Senior Economist at Banca Transilvania, also emphasizing that the excise duty on fuel and the taxation of special constructions have adversely affected the investment plans of companies.

Still, according to the initial forecast which will be reviewed this fall, productive investment should see a gradual recovery starting Q3, indicates Radulescu. Such evolution is expected to be supported by lower financing costs which dropped to historic-lows, a boost in RON-denominated loans, an increase in private consumption and a more proactive policy in terms of public investment.

However, compared to the first half last year, Romania’s GDP expanded by 2.4 percent based on the unadjusted series and by 2.6 percent given the seasonally adjusted series, according to the INSSE. As for Q2 in 2013, there was recorded an improvement by 1.2 for the unadjusted series and by 1.4 percent for the seasonally adjusted series in the similar period this year.

Estimations for this year foresee an economic growth by 2.8 percent, prediction which has not been affected by the GDP’s evolution in H1, says Liviu Voinea, Minister Delegate for Budget, who previously anticipated an overall improvement by 4 percent concerning the entire year.

International institutions such as the International Monetary Fund, the World Bank or the European Bank for Reconstruction and Development anticipate an increase in the GDP which does not exceed 3 percent. The latter updated the initial forecast of 2.4 percent advance of the GDP to 2.6 percent.

Last year Romania has achieved a significant progress in terms of economic growth, the GDP rising by 3.5 percent driven by a strong export performance, a great agricultural year and an unexpected development of the industry.