Romania: Economic growth slows to a two-and-a-half year low in Q1
A second estimate released on 7 June by the Statistical Institute (INSSE) confirmed that in the first quarter, the economy expanded 4.0% over the same period of the previous year, slowing considerably from the fourth quarter’s 6.7% expansion. A sharp deceleration in domestic demand following economic overheating was behind the slowdown.
The disappointing first-quarter result was weighed down by a marked weakening in household spending. Private consumption increased 5.4% year-on-year, less than half of Q4’s 12.3% increase, amid surging inflation and rising interest rates. Moreover, growth in fixed investment also more than halved, coming in at 4.8% (Q4: +10.0% year-on-year). Fixed investment was likely affected by ongoing difficulties in the absorption of EU structural funds and some weakness in the construction sector. Government consumption, however, rebounded to 1.9% growth (Q4: -3.1% yoy).
Exports rose 7.8%, down slightly from Q4’s 8.3% expansion, on the back of solid demand from EU countries for manufactured goods and for machinery and transport equipment. Imports, driven by growing, albeit moderating, domestic demand, expanded 9.1% in Q1 (Q4: +11.4% yoy). Consequently, the external sector continued to drag on growth.
On a quarter-on-quarter basis, GDP growth adjusted for seasonal effects was flat in Q1, considerably down from Q4’s reading of 0.3%.
Romania’s economy grew at the fastest pace among EU countries in 2017, spurred by expansionary fiscal policies and soaring private consumption. However, the pro-cyclical fiscal stance and sizeable budget deficit risk overheating the economy and pose risks to stability in the case of unexpected shocks. That said, the economy should post another year of robust, but slower, growth in 2018, underpinned by favorable financing conditions, robust wage growth and rising EU funds inflows.