Merrill Lynch: The worst is behind Romania

Almost all economic sectors registered decline in the first half of this year, with one exception: industry, which continues to be in the red, but gradually slowed its drop rate in the past few months. Moreover, economists said that industry, especially the manufacturing sector, could be the engine for economic rebound. “We see signs of rebound in Eastern Europe. We expect the decline in Romania’s economy to reach its peak in the second or third quarter. Then, as of the last part of the year, we believe things will pick up. And industry is one of the main engines of the rebound, if not the most important,” Radoslaw Bodys, Bank of America-Merrill Lynch Economist specializing in Emerging Europe, Middle East, and Africa, told Business Standard.

Romania’s economy fell 7.6 percent in the first six months, compared to the corresponding period in 2008, according to the National Institute of Statistics (INS) report. In the second quarter however, there is a slight revision from the previous data: a drop of 8.7 percent compared to 8.8 percent, the initially-forecast level. Gross domestic product (GDP) dropped 1.1 percent compared to the previous quarter, slightly revised downward from the previous level of 1.2 percent.

The sharpest decline in Romania’s economy was registered by the construction sector (14.2 percent), which continued to rise in the first three months of this year. Revenues for net taxes rank second, declining 13.6 percent, while agriculture registered a 9.1 percent drop. The only increase was posted by other service activities, which rose 1.4 percent.

“In annual terms, industry and agriculture bounced back slightly in the second quarter of this year. But I do not expect agriculture to continue its upward trend. Only industry will keep growing, based on foreign demand, especially from Western European countries,” Nicolaie-Alexandru Chideşciuc, Senior Economist of ING Bank Romania, told Business Standard. He added that the Romanian industry is closely related to exports to these countries, and this is why the manufacturing industry will increase in the coming months. “However, I estimate that the third quarter will be the peak of the economic decline, with an approximately 9-10 percent drop in GDP,” Chideşciuc added.

Looking to the future, a significant problem will be the labor market and internal demand. According to foreign economists, internal demand and consumption will continue to decline for a long time. INS data for the second quarter indicates that internal demand has dropped sharply, by 15.6 percent year-on-year, mainly due to a 12 percent decline in total final consumption. Moreover, foreign economists say that unemployment and the massive layoffs that have been announced for the near future in the public sector will have a negative impact on internal demand.