ANALYSIS Romania could have an economic growth of 7%, this year / The flip side: consumption demand increased from household savings during the pandemic could lead to a rapid increase in prices

antreprenor, grafic

Romania’s economy could grow by 7% this year, according to economists interviewed by Economedia. They consider that the 2.8% increase in the gross domestic product in the first quarter is above all expectations, with contributions from all economic sectors. But there is also a downside: this promising growth outlook, along with the savings accumulated by Romanians during the pandemic could lead to a sharp rise in prices.

The National Institute of Statistics (INS) published on Tuesday the estimated data on the evolution of gross domestic product (GDP) in the first three months of the year, which shows an economic growth of 2.8% in the first quarter of 2021 compared to the fourth quarter of 2020, although the economy has shrunk by 0.2% compared to the first quarter of 2020.

Growth in all sectors of the economy

All economists surveyed by Economedia say that this evolution is a positive surprise, which exceeded all market expectations.

Raiffeisen Bank will probably revise its annual forecast for Romania’s economic growth to 7%, Ionuț Dumitru, the bank’s chief economist, told Economedia. “It surprised us, it exceeded all expectations. All sectors of the economy have grown, “said Dumitru.

BCR could also revise its forecast for GDP growth at the end of the year to 6-7%, said Ciprian Dascalu, chief economist of BCR. According to Dascălu, in the first quarter, both industrial production and construction and services provided to companies increased, with a surprise from the services provided to the population, while only retail sales decreased.

Economist Laurian Lungu says the results of the economic growth are very good, above market expectations of 1% increase over the last quarter.

Factors that contributed to the growth

According to Lungu, three factors contributed to this strong growth.

The first factor is the Government, which “has had a correct approach in recent months regarding the pandemic”. “There were no more general lockdowns. Lockdowns were specific in areas where there were a high number of infections. Consequently, there was this flexibility that allowed the economy to breathe. We see the effect of these good measures for the economy and which kept the pandemic under control “, said the economist.

The second factor is the vaccination rate. “However, Romania is somewhere at the forefront of the EU in terms of the number of vaccinations,” the economist explains.

The third factor is that the savings rate has risen sharply during the crisis. “People have money because they have saved quite a lot, on average. And now people can travel more freely, so purchases of goods and services will be on the rise, “Lungu said. According to him, it is also helpful for the time being that there are no discussions about increasing taxation and taxation.

Laurian Lungu estimates that by the end of the year the economy could have a 5-6% growth, “maybe even better”.

Inflation, the danger to the economic growth

However, the strong recovery of the economy also brings a vulnerability, namely a galloping rise in prices, in the context in which freedom of movement is no longer affected by restrictions, the population has tightened savings during the lockdown and now has a high appetite for spending.

“Inflation is a worrying factor. If we look at least at the prices of industrial production, which are a precursor, we can see the effects of those price increases in the index of subsequent consumer prices. In March, these prices had the steepest rise in recent years. What worries me is that the slope is very steep, it grows very fast “, says economist Laurian Lungu.

There are also increases in electricity, fuel, and food prices. It can be a “one-off”, as economists say,  happening now that people start spending, it can last for a quarter and then temper down. But there is also the other option, in which prices rise and remain and will continue to rise. This year’s inflation forecast is already quite high at 4.1%. I think it will be even higher, the forecast is optimistic, given the evolution of prices in March “, the economist added.

According to Laurian Lungu, domestic spending can only put even more pressure on both inflation and the current account deficit, which continues to rise. “We should look at these two elements, they are the sensitive elements in this economic growth”, the economist concluded.

The National Commission for Strategy and Forecast estimates an increase of 5% for the Gross Domestic Product in 2021. The International Monetary Fund estimates that the Romanian economy would register a growth of 6% this year. The European Commission estimates that Romania’s economy will grow by 5.1% in 2021.

Translated from Romanian by Service For Life S.R.L.

Sursa foto: Pixabay

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