Romanian GDP data and how it should be used

Details about the feeble Romanian economic growth in Q2 were released yesterday. Here is the link to the press release in English.

Very brief on the expenditure the fastest growing sectors were industry 4.9% and agriculture 3.4%. On the demand side the internal demand increased by 2.4% while the net exports (external demand) showed a drop of 1.4%.

Are there any surprises? Not on the expenditure side. There both agriculture and industry were expected to have positive contributions. But on the demand side there are few interesting developments. The most obvious is the slower growth in exports than imports. Should have not been a total surprises as the slowdown in EU our major trading partner has been announced for some time. More importantly we should not expect good news from this sector in the months to come.

The other interesting development is the drop of 0.7% in total final consumption due to a decrease in consumption of both households and government.

On the positive I believe the data hides some growth in Gross Fixed Capital Formation but it is too early to tell.

There are two questions that come to mind right now.

First, why should we be surprised with the weak numbers? Did we pursue any economic policies that fostered growth in the last 3 years? No.  Higher taxes and crowding out of private investment by government demand for current expenditures is the wrong strategy for growth. The policies applied so far in Romania, with the help of IMF, are very good at masking deep structural problems in the economy in the short term. It does help if the global economy is growing. But in times of global economic slowdown the problems will surface.

Second, the Fiscal Strategy 2012-2014 relies on two major sectors: internal demand and investment. Recent data is not encouraging for any of them.  So, what is the point of the strategy? Maybe like in the case of market participants economic strategies should be more flexible and allow for adaptive learning and new information. Otherwise they risk losing credibility before even being implemented.

I do not expect them to do it, but you should revise downwards your expectations for 2011, 2012 and 2013 for all real variables.



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