Capital Economics: Romanian Economic Recovery ‘Two Speed And Bumpy’

04.11.2011 By Florentina Dragu

Romanian economic recovery remains “two-speed and bumpy”, with industrial output boosted by external demand, while domestic recovery lags behind, a survey from Capital Economics showed.

Romanian economic recovery remains "two-speed and bumpy", with industrial output boosted by external demand, while domestic recovery lags behind, a survey from Capital Economics showed.

The British research consultant estimates the Romanian central bank will maintain its key rate unchanged throughout 2011 and will choose to curb inflation through a stronger leu.

However, the leu is expected to weaken against the euro toward year-end, because a firm leu would erode export competitiveness, the analysts said.

They said industrial sales data indicate companies continue to run down their inventories, which will come to an end soon, thus supporting output growth in the next six to nine month.

Still, selling that output domestically may be difficult, Capital Economics said.

"Romanian households remain the gloomiest in the European Union according to the consumer confidence element of Eurostat's March Economic Sentiment Index. Such pessimism continues to be reflected in retail sales volumes," the report noted.

The analysts estimate fiscal policy will remain restrictive in 2011, with additional austerity measures, including a further reduction of public sector employment and benefits cuts.

"Reform of the pensions system (which will effectively lead to lower pension payments) will increase precautionary saving by households, depressing consumer demand," the report said.

Additionally, rising non-performing loans will increase banks' reluctance to lend to either consumers or companies.

"On the plus side, liquidity conditions remain benign and capital buffers are significantly above the IMF-set benchmark, which should enable banks to start lending again when the economy begins to pick up," Capital Economics said.