World Bank has released their global outlook for 2012. Among other things it confirms that euro area will see a decrease in real GDP relative to 2011:-0.3%. The figure is not that important what it is important is that WB moves closer to what the market has been expecting for sometime – recession in the euro area in 2012.
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This should not come as a surprise as it would have been very difficult to have growth while imposing austerity measures and the cost of capital is rising. Furthermore, recession will make it more difficult for EU leaders to deal with the sovereign debt problem plaguing the area.
Unfortunately for Romania EU is its main trading partner. Last time euro area entered recession Romania followed one year later with a vengeance. Much like in 2008, 2012 is an election year. Thus recent history would tell us that “political forces” will try to keep the economy growing in 2012 also. There is another difference however with 2008: real and potential growth. In 2008 the economy was growing above its potential growth of 6%. In 2011 and 2012 the potential growth is just above 0% with the economy growing at potential. In this environment it will take a smaller negative shock to push the economy into recession than in 2008.
In order to avoid recession in 2012 or 2013 Romania needs to act today.
Graph: real GDP growth
Sources: IMF and WB