Romanian Recovery Optimism ‘Premature,’ Capital Economics Says

By Adam Brown

Sept. 14 (Bloomberg) -- Romania’s economy, which the central bank says is exiting recession, will contract for a second year as unemployment and bad debt rise and the government cuts spending, Neil Shearing of Capital Economics said.

“It’s premature and a bit worrying to start talking about recovery,” said Shearing, an emerging-Europe economist, in a telephone interview on Sept. 11. “Clearly the outlook has improved but there are still too many downside risks. We see economic contraction of half a percentage point next year.”

Romania’s government has said the economy has started to recover after industrial output and retail sales reports improved and the quarterly contraction in gross domestic product slowed. The government predicts an emergence from recession in the fourth quarter and growth of as much as 1 percent next year.

France and Germany, which Romania relies on for export demand and investment, emerged from their recessions in the second quarter, prompting analysts to predict a recovery across most of eastern European as early as the end of this year.

Romania’s industrial output slump slowed to an annual 6.9 percent in July from 8.9 percent in June and the retail sales drop slowed to an annual 13.8 percent from 17.3 percent, the National Statistics Institute said last week. The contraction slowed to a quarterly 1.1 percent in the second quarter from 2.9 percent in the first quarter.

Recovery Process

“We have started the recovery process, seeing that industrial output has already started to improve,” central bank Governor Mugur Isarescu said on Sept. 9. “There will be more economic growth adjustments in the future.”

While sales and output data improved, unemployment rose to 6.6 percent in August from 6.3 percent in July, exports dropped by 14.5 percent on the year, foreign direct investment plunged almost by half and bad loans more than tripled. On an annual basis, the economic contraction deepened in the second quarter to 8.7 percent from 6.2 percent in the first.

“Bad debt will continue to rise and the labor market will continue to deteriorate, which will further expose the banking sector,” Shearing said. “All in all there are too many uncertainties. And, not least, we will see fiscal policy tightening throughout next year.”

The government has agreed to cut spending and raise some taxes this year and next as part of a 20 billion-euro ($29 billion) international financing package led by the International Monetary Fund and the European Union. Romania joined the EU in 2007 along with Bulgaria.

As state revenue declines, the government must cut 1 billion euros in planned spending this year to target a budget deficit of 7.3 percent of gross domestic product. It must cut expenditure further to meet the 2010 deficit target of less than 6 percent.

The government has frozen state wages and created a tax on services this year. It said last month it will send all state workers on 10 days of unpaid leave this year, fire many next year, raise and announce a series of further measures to contain the deficit.

“It’s too early to speak of recovery with so many uncertainties,” Shearing said. “The outlook is much better than it was at the start of the year,” though “our prediction is fresh and based on the latest data.”

To contact the reporter on this story: Adam Brown in Bucharest at abrown23@bloomberg.net