Thursday, March 13, 2008

Strong Romania consumption fuels inflation worries

By Radu Marinas and Iulia Rosca
BUCHAREST, March 12 (Reuters) - Romania's domestic consumption grew by a robust 10 percent last year due to a real estate boom and household purchases, fuelling new worries over the impact on inflation and the current account deficit.

Consumption grew 8.9 percent on the year in the fourth quarter of 2007, official data showed on Wednesday, compared with 9 percent in July-September and 9.8 percent in the last four months of 2006.

A pick-up in investment growth was a positive sign, economists said, but they warned that consumption was still strong and powered concerns of economic overheating.

"Household consumption remains the main driver of growth, with imports basically helping satiate the overheating in the economy," said Simon Quijano-Evans of UniCredit MIB in Vienna.
The Statistics Office said gross fixed capital formation grew by a hefty 29 percent last year after 19.3 in 2006. It said agriculture, hard hit by drought, recorded the steepest fall of around 17 percent last year after a 3.3 rise a year earlier.

Industry slowed down its growth rate to 5.1 percent in 2007 against 7.0 percent in 2006 while construction expanded by a hefty 33.6 percent from 24.7 percent.

Analysts said a modest slowdown in household consumption growth to 10.2 percent last year against 11.4 percent in 2006 may continue in 2008, but that will keep alive worries over its impact on the country's double-digit external shortfall.

"We had a moderate slowdown in consumption in the fourth quarter because of saturation of private consumption. This should be offset by public spending in 2008," said Ciprian Dascalu, analyst at Millennium Bank in Bucharest.

"Overall, I predict a constant level of consumption growth this year."
Economic growth in Romania slowed to 6 percent in 2007, its first year in the European Union, from 7.7 percent in 2006, mainly due to poor farming and some deterioration of import-related spending which was hit by currency weakening.

But the economy is still seen growing strongly, driven by robust foreign investment, efforts by firms to modernise and strong spending as Romanians race to improve living standards.
Consumption has fanned significant import growth, widening the external shortfall and raising concerns that if foreign cash dries up the country may encounter financial problems. (Editing by Stephen Nisbet)

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