This report covers the main Romanian macroeconomic releases of July 2014 [plus half of August] as well as financial and political trends in the country during this period. The short-term indicators released during the period refer mainly to June and Q2.
There are two inter-related key issues that emerged during the past month [July-August, 2014]: i. problems related to the tax collection, inadequately addressed by the mid-year budget rectification and possibly magnified by lower labour taxation bill and ii. economic slowdown in Romania and several major European countries.

Presidential elections are scheduled for 2 and 9 November. The main scenarios are - PM Victor Ponta wins or loses. In the former case, the ruling PSD will strengthen its support in parliament but will probably not improve its poor administrative capacity. In the latter case, risks of political instability are high – but a more competent executive might emerge eventually. The outcome is not particularly relevant in regards to which candidate beats Ponta. Among the current candidates, independent MEP Monica Macovei [member of PDL, but not supported by her party] has the strongest chance to beat Ponta – but it is unsure that she manages to reach the second round.

Romania’s GDP increased disappointingly by 1.2% y/y in the second quarter of 2014, losing ground from the 3.9% y/y advance in the first quarter, the country’s statistics office reported. The combined annual growth for the first six months was 2.4% y/y.

Key Points
• Industrial output growth eases to 8% y/y in Q2 2014, still above expectations
• Construction works in Romania down 10.2% y/y in Q2 2014, residential segment gains ground
• Retail sales up 7.9% y/y in Q2 2014
• Headline inflation accelerates moderately to 0.95% y/y in July 2014; central bank cut abruptly the quarterly forecast for the end-year inflation rate to 2.2% y/y from 3.3% y/y previously
• Net wages up real 3.7% y/y in Q2 2014; ILO unemployment down 0.3pps y/y to 7.1% in June 2014
• Budget deficit flat y/y at 0.39% of GDP in Q2 2014 [0.5% of GDP in H1] against 2.2% of GDP full-year target; fiscal consolidation driven by subdued capital expenditures; tax revenues disappointing, budget revenues below target
• President Basescu returns to lawmakers bill on lower labour taxation, ruling coalition insists on 5pps cut
• Public debt down to 38.7% of GDP at end-May 2014
• Romanian banks turn to losses in Q2 2014
• NPL ratio down to 20.31% at end-May after change in methodology
• Central bank cuts policy interest rate by 25bps to 3.25%
• C/A gap widens 8 times y/y in June, 12-mo gap hits 1.8%/GDP
• Trade gap widens 25% y/y in Q2 2014 but stays at 0.8%/GDP
• Exports up 5.2% y/y in Q2 2014