By Adam Brown
May 15 (Bloomberg) -- Romania’s economy shrank in the first quarter for the first time since 1999 as lending and wage gains slowed, unemployment rose and exports dropped because of the international financial crisis.
The economy shrank 2.6 percent in the first quarter after growing 2.9 percent in the previous three months, the Bucharest- based National Statistics Institute said in an e-mail today, based on preliminary data. The median estimate in a Bloomberg survey of four economists was for a 3.5 percent decline. In figures not adjusted for the number of working days, GDP shrank 6.4 percent from a year earlier.
“Domestic demand probably fell on both the consumer and the investment sides,” Florin Eugen Sinca, an analyst at Banca Comerciala Romana SA, said in an e-mail. “Household demand shrank due to rising unemployment and negative expectations and negative expectations for wages in coming months.”
Economies in eastern Europe have been shrinking as recessions in Western Europe dried up foreign investment, lending and export purchases, undermining demand among former communist states. The International Monetary Fund has bailed out Hungary, Romania, Latvia, Belarus, Ukraine and Serbia to help the countries avoid default.
The Romanian statistics institute said it will release more precise GDP data on June 2.
Romania’s leu stayed weaker after the GDP report today and was trading down 0.3 percent at 4.1904 per euro as of 10:08 a.m. in Bucharest. The benchmark BET stock index rose 1.4 percent.
In Romania, inflation above the central bank’s target, combined with IMF-mandated government spending cuts, are preventing authorities from boosting spending or sharply lowering interest rates to stimulate growth.
Inflation slowed to 6.5 percent in March from 6.7 percent on year in February although it is still above the central bank’s year-end target of no more than 4.5 percent.
The Banca Nationala a Romaniei, which predicts the economy will stagnate this year, avoiding a recession because of the IMF loan, cut its key interest rate to 9.5 percent from 10 percent last week although it remains the highest in the European Union.
Private debt growth in Romania slowed to an annual 23.1 percent in March from 30.7 percent in February and as fast as 64 percent in June because of the interest rates and a weaker leu, which has made foreign-currency loans more expensive.
Wage growth slowed to an annual 17.6 percent from 19.8 percent while the government froze state wages as part of a 20 billion-euro ($27 billion) international loan accord with the International Monetary Fund, the EU and other lenders.
The loan, to fund the current account and budget deficits, required Romania to narrow its budget gap to 4.6 percent of gross domestic product this year from 4.8 percent last year.
Standard & Poor’s Ratings Services affirmed its sovereign credit rating on Romania at BB+, one notch below investment grade, yesterday partly because of the IMF-led loan agreement.
S&P also maintained a negative outlook on the rating, meaning it’s more likely to downgrade it then upgrade it.
“The Romanian economy continues to face large macro- financial risks due to the sharp fall in external demand and the narrowing of the external commercial credit channel,” S&P said.