Romania post-crisis: more investments but wider twin deficits

The first round of detailed Q2 GDP data released by Romania’s statistics office INS confirmed the 13% YoY economic growth in the second quarter of the year, heralded last month by the flash estimates.

In absolute terms, Romania’s Q2 GDP reached RON 268.8 bln (EUR 54.5 bln). Over the past four quarters, the country’s GDP was RON 1.1 bln (EUR 226.6 bln).

The performance comes after four consecutive quarters of negative annual growth rates, prompted by the COVID-19 crisis.

The economic recovery measured by the quarterly growth rate slowed down to +1.8% QoQ in Q2, from 2.5% QoQ in Q1 and 4%-5% QoQ in the second half of last year. It was just natural, as this year’s 7% growth rate estimated by the state forecasting body equates to 1.7% quarterly growth, and the 5% annual advance seen for the coming years accounts for 1.2% quarterly growth.

In annual terms, the sector of services boasted the strongest growth (+20.6% YoY) followed by industry (+18.8% YoY) and IT&C (+17.1% YoY), while the agriculture and the financial services sectors performed worse (negative growth rate) than last year.

On the utilisation side, domestic consumption rose by 8.1% YoY, while the gross fix capital formation (investments) soared by 12% YoY. Given the different sizes, however, consumption made a contribution to the overall growth that was more than twice the contribution made by the investments (6.1pp versus 2.5pp).

Both exports and imports advanced by as much as 40% YoY in Q2 (as the foreign trade resumed after lockdown), but this does not bode well for the country’s trade balance. The external deficit adds to the wide public deficit prompted by fiscal stimulus and structural issues, creating a risky combination.

While the annual GDP growth rate may be misleading, the growth rates over the past 24 months show better where Romania’s economy reached after last year’s shock. The country’s total GDP in Q2 was 1.6% up (versus Q2, 2019), compared to +2.2% in Q1 and +2.8% in Q4.

The performance was highly uneven among sectors: IT&C posted a 30% advance while the entertainment industry had a 35% contraction. The industry lags 5.4% versus the level reached two years ago - but it was not doing well (-5.6% in similar terms as of Q1 2020 before pandemic) anyways. The sector of construction has advanced by 10% over the past two years.

On the utilisation side, total consumption in Q2 still lags 3.2% behind the level reached two years ago, while the gross fix capital formation advanced by 14.5%.