Romania’s 5% Q1 growth sends mixed messages

Romania’s 5% Q1 growth sends mixed messages
By Iulian Ernst in Bucharest May 15, 2019

Romania’s GDP increased by 5% y/y in Q1, the highest annual growth rate in the past five quarters, according to a flash estimate released by the statistics office on May 15. In seasonally adjusted terms, the quarter’s GDP advanced by 1.3% compared to the last quarter of 2018.

Consequently, the consensus expectations for full-year growth (not much above 3% before the Q1 GDP flash estimate) are expected to see upward adjustments. Banca Transilvania has already hiked its rather conservative 2.9% forecast (3.1% for 2020) to 3.5% (and 3.4% for 2020).

Beside the positive sentiment generated by the robust growth, the figure also consolidates concerns related to the sustainability of the wage-led growth: some industries, like food production, that are most likely to benefit from robust domestic demand, have failed so far to expand in line with, for instance, the prolific retail industry where the profit margins (and wages) appear to have widened significantly, accounting for a large part of the “value added” generated overall. The steep advance of the residential real estate sector, concentrated in first-tier cities, has not reached the levels seen before 2008, but still poses increasing risks.

The annual growth, significantly above the consensus expectations (4.1%-4.4%) came after disappointing 0.6% industrial growth released the day before. 

The record GDP numbers were posted alongside equally robust construction works figures: a 12.4% y/y advance, driven by residential building construction (+26.7% y/y in Q1). The main driver for the GDP growth, on the formation side, was private consumption: retail sales (a proxy for private consumption) increased by 8.4% y/y in the quarter, driven by a record 12.4% real y/y advance of net wages. 

Borrowing played a neutral role in households’ budgets: the volume of new loans contracted in the quarter remained constant compared to same period of last year. But the wider net interest incomes have contributed to banks' profitability, and hence value added contributed to the economy.