Recently, the National Statistics Commission (CNS) published provisional results for the first quarter, confirming the rising trends in economic activity.
The main sources of growth are still exports and industrial output. It also depicts the positive signals concerning the latest developments in the Romanian economy, issued by international institutions, as well as the (somewhat late) correction of Romania’s rating by the main agencies.
According to the estimate, this year the 1.3% GDP growth target may be in fact exceeded.
The biggest problem that remains to be solved is control over prices. Initially, in the government programme, it was believed that resumed economic growth would automatically stop inflation, neglecting the fact that the Romanian economy had not completed its transition to a functional market economy.
Thus, the goal of halving inflation in a single year has proved to be unrealistic (although the mere announcement of a lower level inhibited inflation expectations to some extent).
Certainly, budget corrections will attempt to eliminate this inadvertence.
But it becomes increasingly clear, as the experience of other countries has already proven, that efforts to achieve growth rates of 5-6% a year (as the “national Strategy” states) must be accompanied by firm action to diminish inflation expectations, among which stands out the monopoly of regies and utility companies.
For 2000, the tendency for a lower annual inflation still remains significant, and provided a more severe control in the second half of the year, it could well fit below 35%.
Industrial output
In June, industrial output grew by 2.3% in absolute volume, compared to the previous month, following the May leap (Aâ5.9% on April).
This has accomplished a final delimitation (more than 22%) from January 2000, the month of the all-time minimum in industrial output in comparable prices in the entire period after 1989 (the previous minimum had been in January 1999).
In the first six months of the year, output, according to CNS data, grew 4.9% against the same period of 1999. For July, we expect output to decrease slightly, but in August growth should resume, and accelerate in September.
n the third quarter, we expect a significant rise, both against the previous quarter (around 4%) and against the third quarter of 1999 (around 13.5%).
According to the published data, in the first half-year industrial output was 4.9% over the first half of the previous year, and for the first nine months we forecast more than a 7% increase. Such developments suggest, in our opinion, the beginning of a long-term economic recovery.
Inflation
Aside from January and April, in the first half of the year the monthly inflation rate fell within the government’s target, which aimed at an inflation rate below 30%.
But in June and July, inflation reached 2.8% and 4.3%, respectively. In the first seven months of the year, inflation was 24.1%, which is equivalent to around 45% annual inflation (therefore, much above the stated goal).
But this is still significantly lower than the inflation rate in the first seven months of 1999 (33%), which indicates a downward trend in price changes. In August and September, according to our forecasts, inflation will be lower (less than 3%), but this will still not produce an annual inflation below 40%.
In the first three quarters, we forecast an inflation rate of roughly 30% (compared to 39% in January-September 1999). Under these circumstances, steps takes to stabilise prices in the last part of the year become a priority.
Next to the NBR policy, whose goal is to stop inflation tendencies, fundamental to a decreasing inflation rate in the long term is the recovery of national supply (including by having authorities promote supply-side policies).
High inflation will continue to coexist with a positive rhythm of economic growth in the next years, too.
Unemployment
Correlated to the general trend of economic recovery, beginning with March, there is a significant drop in the number of unemployed (from around 1,197,000 in late February to 1,067,000 in late June).
This will probably continue, although at a slower pace, until the end of the third quarter. But given the need to continue economic restructuring, the unemployment rate will not always be mated to output.
According to our estimates, speedier restructuring in the national economy in the last part of the year and in 2001 will probably be accompanied by more unemployed and therefore additional pressure on the budget.
For 2000, officials are already envisioning a rise in the unemployed pool, by the end of the year, by some 150,000 people.
A significant reduction of unemployment will be possible, in the longer run, only as far as economic restructuring will be accomplished and conditions are set into place for durable economic growth.
This first of all calls for broad investment programmes, which, at least in the first stage, will target the public sector and the modernisation of infrastructure, with beneficial effects on the absorption of idle workforce.
Monetary base
Compared to the previous year, in the first part of 2000 the connection between the developments in monetary base and inflation has improved.
At the end of May, the monetary base was almost 17% above the end of last year, compared to 15.8% inflation in the first five months of the present year (at the end of 1999, monetary base was almost 80% higher than at the end of the previous year, compared to the almost 55% annual inflation rate).
After a slow pace in the first two months of the year (Aâ1% in January and Aâ1.8% in February), in the following months the monetary base (daily average) grew significantly (4.5% in March, 6.9% in April and 4.8% in May).
For June, we estimate a certain slowdown in growth (around 2.4%), and the following months we forecast an acceleration of growth (3.5% in July, 3.9% in August and 4.4% in September).
In the longer term, the dynamics of monetary base will probably be correlated both with the growth rate in the real economy and with inflation. In this regard, commercial banks may be allowed to reduce their security deposits with the NBR in the future.
There is also the lag within which the possible perturbations induced by the new fiscal rules will propagate, so as not to significantly affect lei transactions in the economy or the dynamics of the leu/dollar exchange rate.
The situation will probably improve in the future, as prices tend to stabilise and the economy is “re-monetised.”
Popular savings
Total savings by the populace (including savings in lei and hard currency, converted at the exchange rate) grew last year less than inflation (44%, compared to almost 55% inflation), a significant depreciation in real terms.
The tendency continued in the first part of this year, when only in the January – May period, for instance, the depreciation was 6.4 percentage points (in the first five months, inflation was 15.8%, while people’s savings grew only 9.4% in nominal terms).
According to our estimates, savings continued to depreciate in June and July (the difference was roughly one point in June and two points in July), Only in August and September, popular savings are expected to outpace consumer prices. By quarters, the depreciation of popular savings appears as follows: Q1 – 0.5 points, Q2 – 6.3 points, Q3 – 1.1 points.
In the first nine months of the year, according to our forecasts, depreciation will probably amount to nine points. As to the structure of people’s savings, the hard currency component has strengthened last year, from 26.0% in late 1998 to 34.9% in late 1999.
This tendency, which continued in the first part of this year, will only be stopped as trust in the national currency grows (at the end of May, the weight of the hard currency component was 35.4%).
Exchange rate
The depreciation of the US dollar exchange rate was around two-thirds last year, compared to an annual inflation rate of almost 55%.
In the first part of this year, the exchange rate has been unstable, above inflation in January, April and July, and below it in February, March and May.
For August, we forecast an exchange rate growth above inflation, and for September one below it. In the first quarter, the inflation rate was superior to the growth of the exchange rate by 1.8 percentage points, and in the second quarter the two rates will be roughly equal (9.6% vs. 9.7%).
In the first seven months of the year, the nominal depreciation of the national currency (around 20%) was significantly below inflation (around 24%). For the third quarter, we expect the exchange rate to be below inflation, with a difference of about 0.7 percentage points.
It is notable that the relatively slow depreciation of the exchange rate compared to domestic inflation (if we use the leu/euro rate, which applies to almost 65% of Romanian exports, it has actually been an appreciation) should have, according to mainstream economic theory, inhibited exports, which did not happen.
This proves that the latest expansion of Romanian exports did not occur on the account of the leu’s depreciation, but rather due to a better connection to domestic demand and the use of export niches offered by a relatively stable foreign market, such as the West-European one, for domestic producers.