Romania: Economy grows at quickest pace on record in Q2; political turmoil clouds horizon
September 7, 2021
A second release confirmed that GDP bounced back, expanding 13.0% year-on-year in the second quarter, matching the preliminary reading and contrasting the 0.2% contraction recorded in the first quarter.
The upturn reflected a broad-based improvement in activity as the gradual easing of Covid-19 curbs released pent-up demand. Household spending growth improved to 10.1% year-on-year in the second quarter, which marked the best reading since Q4 2017 (Q1: +0.8% yoy). Public spending, meanwhile, rebounded, growing 2.5% in Q2 (Q1: -4.4% yoy) as the government deployed additional fiscal tools to help the economy shrug off the pandemic’s damage. Moreover, fixed investment growth edged up to 12.0% in Q2, from the 11.7% expansion in the prior quarter.
On the external front, exports of goods and services growth accelerated to 41.0% in Q2 (Q1: +1.0% yoy). In addition, imports of goods and services growth sped up to 40.3% in Q2 (Q1: +3.9% yoy).
Meanwhile, on a seasonally-adjusted quarter-on-quarter basis, economic growth waned to 1.8% in Q2—the slowest expansion since Q2 2020— down from the previous period's 2.5% increase, highlighting that a low base effect flattered the year-on-year reading.
Commenting on the outlook, Eugen Sinca, analyst at Erste Bank, said:
“We keep our GDP growth forecast unchanged at 7.4% in 2021 and 4.5% in 2022. We expect gross fixed capital formation to become an important driver for economic growth, boosted by combined inflows of EU funds of almost EUR 80bn over 2021–2027 period from the regular Multiannual Financial Framework and the Next Generation EU Program.”
However, with the country’s recovery plan still pending the Commission’s approval, the timing of the disbursement of funds remains unknown. On top of this, a renewed political crisis erupted in early September, after Prime Minister Florin Cî?u sacked the justice minister Stelian Ion, member of the Union to Save Romania PLUS party (USR-PLUS)—the second largest party in the government coalition. The minister’s removal was answered with the resignation of the remaining ministers from the USR-PLUS party, as well as the filing of a motion of no confidence, which nonetheless failed to gain support from the main opposition party, PSD. With Cî?u currently leading a minority government, elections become a possible scenario, rendering the country susceptible to protracted political instability.
Analysts at Fitch Ratings warn of delays to the disbursement of EU funds and risks regarding fiscal consolidation:
“It is uncertain how far a minority PNL-led government or a new PSD-led government would be able or willing to push through politically sensitive reforms to healthcare, wages, pensions and the judiciary. This could further delay European Commission approval of the NRRP, which the government initially expected by end-September. […] The government had expected to propose a unitary wage and a pension bill by end-2021 and had pledged to increase tax compliance to reduce a large VAT revenue gap. But little progress has been made in recent months and now the prospects of rapid implementation have diminished further, although the NRRP could still serve as a policy anchor.”
Author: Alexandros Petropoulos,