Tuesday, February 12, 2008

Romania at A Glance - January 2008

Romania Economy Watch

Welcome to Romanian Economy Watch Blog. Below you will find the conventional chronological blog posts. But first we would like to present some charts which provide background data which we hope will help the first time reader better assess and get to grips with the argument about the roots of Romania's emerging economic crisis which is being presented here.

The data being present here is both conventional and non conventional, and reflects our in house view that demographic components need to be taken alongside more conventional macro-economic ones to appreciate growth dynamics, and in particular in the Eastern Europe context. So, alongside charts for the exchange rate and consumer debt, you will also find charts for Romanian male life expectancy, live births and fertility, out migration to Italy and Spain (based on data from ISTAT and INE) as well as quarterly GDP growth, retail sales, inflation, as well as for the trade and current account balances. Basically we hope you will find this background data useful in assessing the argument which we are presenting on this blog, namely that Romania's demography,as proxied in long term fertility and out-migration rates (there are over a million people missing from the potential labour force due to out migration alone), means that current growth rates, or anything near them, cannot be sustained without provoking continuous inflation, and loss of export competitiveness, the combination of which may well lead to severe macroeconomic consequences. Please click on thumbnails for better viewing.

In the first place we show the recent decline in the Romanian leunon-leu indebtedness of the Romanian population (which of course, makes the risk from a correction in the currency even more significant. vis-a-vis the euro, together with a chart indicating the growing

To give an indication of the rate at which this problem is growing, according to data from the Romanian central bank, in October 2007 the nominal value of non-government credit advanced year-on-year by 51.4%, with a 40.5% growth in RON-denominated loans and a 63.3% rise in foreign currency-denominated loans when expressed in RON (expressed in EUR, forex loans expanded by 72.4 percent).

Next on the left there is a chart for quarterly GDP growth The Romanian economy has been growing strongly, although not excessively, in recent quarters, but what is driving this growth? On the right you can see the rapid acceleration in retail sales since the middle of this year. This expansion in domestic consumption is in part produced by a strong inflow of remittances the large number of Romanians who are now living and working abroad.

On the left you can see the number of Romanians who have residence in Italy according to ISTAT, and on the right you can see the equivalent number for Spain according to the INE. Exact figures for the total numbers of Romanians abroad are impossible to come by (which makes it impossible to calibrate anything resembling a NAIRU for Romania) for the simple reason the the Romanian authorities do not attempt to obtain an accurate measure as can be seen from the official migration statistics included in the chart on the right.

Next on the left we have a chart where you can see the recent acceleration in Romanian inflation while on the right we can see the upward movement in wages and salaries.As strong growth continues and labour capacity constraints are hit, due to the declining quantity and quality of labour which remains, a critical point is reached when wages and retail prices start to rise rapidly.

Here you can see on the left the consequences of this dynamic for the Romanian trade balance and on the right the correlate of this for the current account deficit. As domestic prices rise, imports become cheaper and get sucked in in ever larger quantities while exports get more expensive and export growth slows.

On the left are the annual numbers of live births - which is really what matters from a labour supply point of view. This has been dropping since the late 60s.Then you can see Romanian male life expectancy, which is compartively low, and this is a big complicating factor in raising participation rates among older workers to replace those who have either left or simply not been born.

2008 Forecasts:Consenus Economics are forecasting economic growth in Romania of 6.3% for 2007, and a slightly slower 5.7% for 2008. The number for 2007 seems about right, although the final reading may even be slightly higher given the governent fiscal stimulus during the second half of the year, while the number for 2008 may be rather on the high side, depending on the pace and extent of the slowdown. Really everything here hinges on whether Romania has a soft or hard landing, and when. My own feeling is that the landing will be a hard one, but the timing is very hard to foresee, and it is the timing which will have the greatest influence on the final outcome. As long as things continue as is, then the consensus forecast looks about right, but will things continue as is? The IMF in their October World Economic Outlook came in with a similar figure of 6.3% for 2007 and 6% for 2008, the Economist Intelligence Unit is forecasting growth in the 5 to 5.5% range for 2008, while the EU Commission put the figure at 5.9% in its November forecast.More interestingly the Commission sugest that this rate is achieveable without producing any significant reduction in the unemployment rate (currently officially around 7% on ILO methodology), which suggests they feel it can mainly be achieved by increasing participation rates, and redeploying labour from non productive to more productive sectors. But - as in Poland, where a large number of citizens are also known to be working abroad - it is very hard to know what credence to give the official unemployment data. Certainly a number of Romanian ministers have been very vocal in recent weeks stating that Romania has an urgent need for anywhere between 500,000 and 1 million workers.

My own view is rather more downside than all of this. A lot really depends on factors outside Romania's control, and internally the party can obviously continue for as long as it is allowed to. One limit point may well be the ability of Romanian citizens to continue contracting debt at this rate. It is noteable that despite the strong inflow of remittances and the inflow of bank funds for credit purposes the leu has been sliding. Should the appetite for credit inside Romania start to dry up, or should changed credit rules force it to, then pressure on the leu may become very strong indeed. Another limit obviously exists on the labour supply front. The IMF put Romania's growth rate at between 5 and 6% in their 2006 annual staff report, and they did this, interestingly enough, by attributing a negative (-0,2%) component to labour supply in a growth accounting study. So they are expecting the growth to come from an injection of capital and TFP. But this is where macroeconomics gets to be a funny business, since much of the growth which actually takes place in modern economies is quite labour intensive, and without that labour relative prices get out of line, and the impact of this mis-alignment is a brake on growth. So basically I would say here that the proof of the pudding is going to be in the eating. If Romania had the labour force to complement its aspirations, then I would say 6% growth would not necesssarily constitute overheating, but under the circumstances it may well do. If I have to put a number on anticipated growth in Romania next year - and that is what forcasts are all about isn't it - then I would go for something in the 3 to 3.5% range, depending on how far we are into the year before the brakes are actually slammed on. That is we may well see growth continuing during Q1 at a pace which is not much slower than the present one, but from there on in things will in all likelihood start to complicate themselves, the only real outstanding question being, I feel, how far and how fast?

1 comment:

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