Drought shrivelling GDP

Agriculture, which accounts for 14 percent of GDP, is heavily affected by the drought and production will be significantly lower than expected. "The advance of GDP could slow by up to 2 percent" because of agriculture, according to Raiffeisen Bank's head of the Macroeconomics Research Department,  Ionut Dumitru.

This situation is very similar to that in 2005, when economic growth was a mere 4.1 percent due to heavy floods affecting agriculture.

However, ABN Amro Senior Analyst Radu Craciun and ING Bank Chief Economist Florin  Citu say that GDP could be up to 6 percent higher year-on year in 2007, against the government's 6.5 percent forecast.

Drought could also affect inflation, because prices of agricultural products are likely to rise by 1 percent. The government's inflation target is 4 percent for 2007, but Central Bank Governor Mugur Isarescu's recent estimates show this year's inflation is currently about 3.7 percent.

Dumitru said inflation could increase due to a rise in the price of bread, as this  makes up a significant ratio for calculating inflation. Producers recently said the prices of baked goods could increase by 20 percent due to the drought, although analysts have indicated that such estimates are exaggerated.

Craciun also added that  higher bread prices will be balanced by the import of cheaper fruits and vegetables, due to the strong leu. "The result will lead to increased imports, leading to a widening of the trade deficit to €16.9 billion in 2007," he said.

Romania could also reduce its exports of energy due to lower production because of the drought. This and the imports of raw materials could widen the current account  deficit to 12 percent, according to Craciun, or even to 13 percent, in Citu's opinion.

Expensive bread
Producers recently said the prices of baked goods could increase by 20 percent due to the drought, although analysts have indicated that such estimates are exaggerated.