Recovery Gaining Momentum
BMI View: Romania's improving net export s drove a n above consensus 2.2% yea r-on-year real GDP expans ion in Q113, confirming our view that the country's economic recovery would accelerat e in H113, and we hold to our forecast for real GDP growth of 1.7% in 2013. N et exports will continue driving growth, although improving private consumption and the slowing pace of fiscal consolidation will begin playing an increasingly significant role in the country's economic recovery from H213.
Recently released data from Eurostat showed that Romanian real GDP expanded 2.2% year-on-year (y-o-y) in Q113, beating analysts' expectations. The better-than-expected growth figures marked a significant acceleration from the 0.3% y-o-y expansion recorded in Q412, and confirms our view that the country's economic recovery would gain momentum in 2013 ( see 'Modest Economic Recovery Ahead', March 8) . First quarter growth was driven by strong ne t exports, as weak import demand combined with steady export growth resulted in the countr y register ing its first current account surplus since the fall of commun ism .
We hold to our above-consensus real GDP growth forecast of 1.7% in 2013 and 2.8% in 2014, expecting improving private consumption and a recovery in government spending to support growth in H213 . While net exports will continue being a significant driver of headline growth over the next few quarters, recovering domestic demand should provide a modest boost to imports, ensuring that its positive impact on growth is less significant in H213 and 2014 .
|Romania - Real GDP Growth, % chg y-o-y|
Private Consumption: In Q113, private consumption remained weak , subtracting 1.2 percentage points (pp) from growth, as public wage restorations and an increase in pensions failed to bolster the consumer spending picture. However, the figures were an improvement on the 2.6pp consumption subtract ed from growth in Q412 , and we now expect consumer s pending to improve more significantly in H213 and 2014, as slowing headline inflation and a more robust agricultural harvest give retail sales a boost.
Our Commodities team expects elevated food prices and the better harvest to drive an agricultural recovery in 2013, supporting the incomes of the estimated three million Romanians (30% of the country's wor kforce) employed in the sector and boosting household expenditure. We forecast private consumption to add 0.3 pp to headline growth in 2013, from 0.1pp in 2012, and believe there are signs that Romanian consumer sentiment is turning a corner. A lthough remaining depressed on a historical basis, the European Commission's retail trade index increased to level of 13.3 in May, from 3.1 in April, while the consumer confidence index ticked up to -34.0, from -37.2 in the same period.
|Signs Of Recovery|
|Romania - Consumer Confidence Index (LHS), & Retail Confidence Index (RHS)|
Government Spending: Government spending added 1.2pp to growth in Q113, from up 1.0pp in Q412, as Romania's recent exit from the EU's Excessive Deficit Procedure (implemented on EU countries with a fiscal deficit above 3.0% of GDP) allowed the government to loosen the fiscal reigns slightly. The growth differential between public expenditures and budget revenues widened in April, with the fiscal deficit up to RON7.5bn in the first four months of the year. While we expect the fiscal deficit to narrow slightly this year to 2.6% of GDP, the pace of consolidation will slow over the next few quarters, having fallen 2.7pp to 2.9% of GDP in 2012 (see 'Fiscal Consolidation Losing Momentum', June 6). With Prime Minister Victor Ponta's administration pencilling in further public sector wage increases in July, and depressed earnings likely weigh on tax receipts going forward , we expect government spending to add 0.2pp to growth in 2013 and 0.3pp in 2014.
Investment Spending: We expect investment spending to act as a drag on a more robust economic recovery in 2013 and 2014, as slumping foreign direct investment (FDI) and the depressed construction sector keeps fixed capital growth on a downward trajectory. In Q113, net FDI amounted to EUR116mn, down from EUR419mn in the same quarter of the previous quarter, as the deteriorating economic environment in the euro area predicated a shift towards short-term investment flows. Investment spending contributed 0.2pp to growth in Q113, down from 0.3pp in Q412, and we see gross fixed capital formation adding just 0.1pp to growth in 2013. Our Infrastructure team remains particularly cautious towards Romania's residential construction sector in 2013 , which accounted for over 60% of total construction in 2012. We expect residential construction to continue lagging behind economic growth, as large spending decisions are delayed due to the uncertain economic environment , although improving conditions could support the start of a construction recovery in 2014 or 2015.
|Net Exports Driving Growth|
|Romania - Percentage Point Contribution To Real GDP Growth, % chg q-o-q|
Net Exports: Net exports were the most significant driver of economic growth in Q113, and will continue to play a central role in Romania's economic recovery over the next few quarters. Net exports contributed 3.2pp to growth in Q1 , from a 0.8pp contrac tion the previous quarter, which resulted from steady exports, and weak domestic demand combining to restricting import growth. R easonably strong exports should continue to drive Romanian real GDP growth going forward, with the weakening leu making exports more attractive (the leu lost 5.5% in value against the euro from May 23 to June 12 as CE E bond market volatility lessened demand for the currency) . However, our expectation for a recovery of domestic demand in Romania should ensure that the positive impact of net exports is not as significant in H213 (see 'Don't Be Fooled By Q1 Current Account Surplus', June 4).
Risks To Outlook
Although we remain above consensus for Romanian real GDP growth in 2013, we believe the main risks to our real GDP growth forecast lie to the downside. If the economic recovery in the EU fails to gain momentum, then we would expect demand for Romanian exports to stagnate. While the country is increasingly shifting its focus towards non-EU export destinations, over 65% of total exports went to the bloc in 2012. Worse than expected real GDP growth in the region would therefore weigh on Romania's economic recovery, and would require a downgrade to our real GDP forecasts for 2013.