Tuesday, September 1, 2009

Romania Q2 spending shrinks, signs of recovery seen

BUCHAREST, Sept 1 (Reuters) - The Romanian economy showed signs of bottoming out in the second quarter as consumption shrivelled by 12 percent on the year but industry recorded small gains, according to data releases on Tuesday.On the quarter, consumption fell by 2.8 percent while industry rose by 4.5 percent and investment increased by 11.2 percent.

In recent months, consumption, the key driver of the Romanian economy, took a serious hit as global financial woes dried up credit lines, boosted unemployment and soured consumer mood.Revised GDP figures on Tuesday showed the economy collapsing by 8.7 percent on the year in the second quarter, versus a preliminary estimate of 8.8 percent and 6.2 percent in the first three months of the year.

But analysts said Q3 figures would show mild improvement, largely because of a better economic situation in Romania's main trading partners in the West and some recovery in local industry and savings.'We have reached the bottom and the next two quarters will look better,' said Melania Hancila from Volskbank in Bucharest.

Gross capital formation also shows signs of slight recovery and points to a change in consumer behaviour,' she said.Still, most analysts see at least one more cut in interest rates to help fight recession, after central bank borrowing costs fell from a peak of 10.25 percent last year to 8.50 percent.

The remaining scope for cuts will depend on fiscal policy and its impact on inflation, economists said, as Romania struggles to contain public spending to meet conditions for aid from the International Monetary Fund.'I still expect a 50 basis point cut in September and we may see further cuts later, depending on inflation figures and on whether the fiscal policy will tighten,' said Nicolaie Alexandru-Chidesciuc of ING Bank in Bucharest.

The IMF, which last month completed its first review of the aid programme, expects the economy to shrink by up to 8.5 percent this year.

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