BUCHAREST, May 21 (Reuters) - Romania's sharp economic contraction will continue in the second quarter, before moderating slightly later this year, as the impact of the financial crisis on domestic demand deepens, a central banker said on Thursday.
Like many of its neighbours, Romania slid into recession this year as global financial turmoil struck manufacturing and thinned down consumption, but economists said the full impact of economic troubles has yet to hit many Romanians.
The unemployment rate has risen to more than 5 percent from less than 4 percent last year and government officials expect it to rise further to some 7 percent by the end of the year.
'(Economic contraction) will be significant once more (in Q2) and then improve towards the end of the year,' Lucian Croitoru, an advisor to governor Mugur Isarescu, told reporters.
'Romanians are only just beginning to understand there is a recession and ... cut spending,' he said.
The Romanian economy shrank by 6.4 percent on the year in the first quarter. Croitoru reiterated expectations of a 4 percent contraction in all of 2009.
However, some analysts say any gradual improvement in the economy may occur later than Croitoru suggested, largely because poor weather conditions, including a drought, may slash farming output and increase economic pain later this year.
'But there is the risk of a weak agricultural year. If this materialises, the negative impact will be substantial and it is possible that the GDP will continue to drop. We are not ruling a contraction of 10 percent.'
Speaking on the sidelines of an economic seminar, Croitoru also said that currency depreciation will have a diminished impact on inflation from now on.
'Inflation is going to come down (this year) because the recession is pulling it down. We won't be having any more (currency) depreciation,' he said.
A weak currency has been a key factor behind the Romanian central bank's cautious approach to easing borrowing costs in recent months to help the economy. Combining with persistent domestic consumption it had kept inflation high.
The bank cut its benchmark rate by a half point to 9.50 percent in recent weeks but said any room for further easing was limited.