Romania Watch: GDP up by only 0.3% qoq in Q3, well below expectations

Real GDP dynamics in Q3 (0.3% qoq; 7.2% yoy) came in substantially below our expectations and analyst’s consensus. Economic performance should remain weak in Q4 mainly due to the COVID-19 restrictions. As a result, we revise downwards our GDP forecast for 2021 to 6.2% from 7.5%.

Very small advance of real GDP in 2021 Q3
National Institute of Statistics, RBI/Raiffeisen Research

GDP flash estimates for Q3 released today revealed an unexpected rapid slowdown in economic growth during this period. Thus, real GDP increased by only 0.3% in Q3 compared to Q2, substantially lower than our expectations for an increase by 1.4-1.7%. Also, real GDP advanced by 7.2% in Q3 2021 compared to Q3 2020 that was well below both our expectations (+10.5%) and those of other economic analysts summarized in the Bloomberg survey (+9.7%).

The modest quarterly advance of real GDP of 0.3% qoq in Q3 should have been primarily sustained by growth of households’ consumption. In Q3 volume of retail sales went up by 1.3% qoq, while deflated turnover in services for population increased by 26.2% qoq. On the GDP formation side, industry and construction sector should have had negative contributions to the quarterly dynamics of real GDP (in Q3 industrial output decreased by 4.6% qoq, while construction output fell by 10.2% qoq). So, we expect the services sector and the agriculture to have been the main drivers of economic growth in Q3. Statistical office will release details on dynamics of GDP components on 7 December.

However, we consider that real GDP without agriculture reflects much better the performance of the Romanian economy as it is not impacted by the volatile dynamics of agriculture. Statistical office will publish the figure on agriculture’s performance in Q3 only on 7 December. If we assume a 30% increase in the gross value added of agriculture in Q3 2021 compared to Q3 2020 when it was depressed by severe drought, our estimates indicate an annual advance of real GDP without agriculture of 5.3% in Q3 2021. This is substantially below our expectations for a 8.9% advance, but also well below the 7.2% advance of real GDP. More importantly, our in-house seasonally adjusted data suggest a decrease in real GDP without agriculture by 0.3% in Q3 from Q2 (at odds with the 0.3% quarterly advance of real GDP).

Going forward, we expect the economic performance to remain modest also in Q4. The rapid increase in the number of COVID-19 infections and deaths led to more severe containment measures this quarter, which should have a negative impact on the activity of some economic sectors. Moreover, the rapid increase of consumer prices would probably have a negative impact on consumption spending. Given the real GDP dynamics well below our expectations from Q3 and the prospects of a weak economic performance in Q4, we are revising downwards our economic growth forecast for 2021 to 6.2% from 7.5%. For the time being, we keep unchanged our GDP forecast for 2022 at 4.7%, but we see downside risks to this figure as well.

The economic performance below expectations could be a reason for the central bank to further show prudence in tightening the monetary policy stance. However, we believe that the very sharp deterioration of inflation outlook will weigh more on its next monetary policy decisions. Thus, we believe that the monetary policy tightening cycle should continue at a sustained pace going forward. Hence, we expect the monetary policy interest rate to be increased each time at the following monetary policy meetings until reaching a level of 3.5% in July 2022. Moreover, we expect a 50bp increase of the key rate both in January and February 2022.

Real GDP indexes in CEE countries, 2019 Q4 = 100
Eurostat, RBI/Raiffeisen Research
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Andreea-Elena DRAGHIA

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Andreea Draghia is a financial analyst at Raiffeisen Bank in Bucharest. She joined the Economic and Sectoral Research team in June 2020 primarily focusing on the developments in the Romanian economy. Prior to joining Raiffeisen Bank she worked as an economist at the Romanian Fiscal Council. She graduated the Faculty of Finance, Insurance, Banking and Stock Exchange and has a master’s degree in finance at the Advanced Research in Finance (CEFIN) within the Bucharest University of Economic Studies. Andreea is interested in macroeconomics and econometrics and has a passion for technology and travelling.

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Nicolae COVRIG

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Nicolae has 20 years of experience in applied macroeconomic research, working as a financial analyst in the Economic and Sectoral Research Directorate of Raiffeisen Bank Romania. Nicolae is also an associate lector at the Bucharest Academy of Economic Studies, Department of Money and Banking. Previously, he worked as an economist in the Macroeconomic Modeling and Forecasting Directorate from the National Bank of Romania and as an assistant professor at the Department of Money and Banking from the Bucharest Academy of Economic Studies. Nicolae has a master's degree at the Doctoral School of Banking Finance (DOFIN) and a PhD in finance at the Bucharest Academy of Economic Studies. Nicolae is a member of CFA Institute and CFA Romania. He is passionate about macroeconomics and psychology.