The first part of the year was marked by the submission to Brussels of the national development Strategy and the signing of the accord with the International Monetary Fund, as well as tensions of the financial-banking market (the FNI, BPR, BIR and other cases). In the first half of the year, the first signs of economic recovery have been seen, mainly due to favourable factors such as a growth in exports and a relaxed position with foreign debt. To instate a cycle of durable economic growth in the long term, it is important that recovery continues more vigorously in the period ahead.
In February and March, industrial output grew significantly (Aâ7.8% and Aâ11.1%, respectively). This has put an end to the crisis in the previous months (-9.9% in December 1999 and -7.3% in January 2000), when the absolute minimum was attained in monthly output in comparable prices, for the entire period after 1989 (the previous low had been attained in January 1999). In April, output dropped in absolute terms against March (-5,7%). In comparable terms of working days, however, there was a growth (Aâ4.7%), according to provisional data recently published by the National Statistics Commission. Over the first four months of the year, industrial output was nevertheless higher by around 0.8% than in the same period of 1999. For the following two months, we expects industrial output to resume, for a 7% quarter-on-quarter growth in Q2 and 7.5-8.5% growth against last year. The cumulated industrial output at the end of June 2000, expressed in constant prices, will exceed by almost 4% that achieved in the first six months of last year. In our opinion, such developments will signify a beginning of longer-term economic recovery, including some structural changes (restrained activity in branches without sales opportunities on the domestic and foreign market and the development of those with a proven market competitiveness).
Aside from January and April, in the first part of the year the monthly inflation rate fit within government norms, which target an annual inflation below 30%. In May, inflation was 1.8%, and for June we even expect less than 1.5% (which will also probably extend into the other summer months). In the first five months of the year, inflation was 15.8%, equivalent to an annual rate of roughly 42% (therefore, still much above authorities’ target). In the first half-year, inflation will probably stand at 17-17.5% (compared to 30.8% in the first six months of 1999). This in itself produces a lower annualised interest rate, 37-38%, therefore closer to the goal. Under these circumstances, the goal of stabilising prices for the second half of the year becomes extremely important. Next to the Central Bank’s policy, aimed at putting a brake on inflation tendencies, fundamental for decreasing inflation in the long term is to revive the national offer (party by having authorities promote supply-side policies stimulating savings and investments). The association of economic growth with inflation will remain, however, characteristic to transition and reform in Romania (only after 2004, inflation is expected to drop under 10%).
After the significant growth in the first two months, unemployment dropped to 11.6% at the end of April. As economic restructuring continued, the unemployment rate will remain loosely connected to the pace of output in absolute terms. According to our estimates, in May and June the unemployment rate will grow slightly (0.1-0.2 percentage points a month). Speedier restructuring of the national economy this year will probably be accompanied by more jobless and thus by additional pressure on the budget (for the year 2000, officials expect more than 150,000 people to join the unemployed pool). Of course, a number of workforce conversion and recycling programmes will have to be enforced (some of using foreign financing). A significant decline in unemployment, in a more remote perspective, will only be possible if the national economy is restructured and conditions are set into place for a durable economic recovery. This calls, first of all, for large-scale investment programmes, which, at least in the first stage, will target the public sector and the modernisation of infrastructure.
Monetary base was at the end of 1999 almost 80% higher than at the end of the previous year, compared to the 54.8% annual inflation. In the first two months of the year, the change in monetary base (the daily average) was insignificant (Aâ1% in January and Aâ1.8% in February), but in March the change was 4.5%. For the April-June period, our estimates reveal even higher growth rates, between 2-4%. In the longer term, monetary base, reflecting one of the direct possibilities of covering the economy’s needs with money, will probably be correlated both with the growth rate of the real economy and with inflation. Still, considering the propagation of perturbations induced by the new fiscal rules, at least in the first 4-5 months of the year, there has been a gap between the developments in monetary base (in nominal terms) and consumer prices, which has affected cash transactions in lei, as well as the leu/dollar exchange rate. But the situation will improve, according to our forecasts, in the summer months, once prices tend to stabilise and the economy is re-monetised.
In 1999, the people’s savings grew less than inflation (44% compared to almost 55% inflation), which is a significant depreciation in real terms. The tendency, begun in the last two months of 1999, when people’s savings (in nominal terms) outpaced inflation, was reverted in January and February 2000. Only in March, savings again outgrew monthly inflation (3.7% compared to 1.8%). It probably continued into the following months. For the second quarter, we expect a real-terms appreciation of households’ savings (2-3%). As to the structure by the two components (savings in lei and in hard currency, converted at the exchange rate), in 1999 the hard currency component continued to grow, from 26.0% at the end of 1998, to 34.9%, late last year (of course, a major impact was brought by the significant depreciation of the domestic currency against hard currencies used in people’s deposits). This tendency will be stopped only as confidence in the national currency will grow. In late January, the hard currency component had already exceeded 35%, and at the end of the first quarter it was around 34%. For the second quarter, we gauge that the hard currency component will not have suffered significant changes.
In 1999, depreciation in nominal terms of the exchange rate against the US dollar has been around two-thirds (compared to an annual inflation rate of almost 55%). In January this year, the exchange rate developed more slowly than consumer prices (1.2% compared to a 4.3% inflation), but in February and March the leu’s depreciation in nominal terms (2.3% and 3.1%, respectively) has been somewhat higher than inflation (2.2% and 1.8%, respectively). In April, however, the situation reverted, due to a significant rise in inflation. In May, according to official data, and in June, according to our estimates, the exchange rate again outpaced consumer prices. In the first five months of the year, cumulated devaluation of the domestic currency (13.4%) was below inflation (15.8%). In the months to come, under the impact of the expected stabilisation of domestic prices and ongoing positive trends in foreign trade, the exchange rate may stabilise to a relative extent. To this end, the Central Bank should continue its interventions to maintain the exchange rate within a safety corridor and keep popular and business interest for accumulations in national currency.