Romania Watch: Large contraction of industrial output in September and in Q3
Industrial activity suffered a lot this year due to bottlenecks existing in the global production and distribution chains. Large contraction in industrial output in Q3 (-4.6% qoq) increases downside risks to our GDP growth forecast for Q3 (1.4-1.7% qoq) and for year 2021 (+7.5%).
| Industrial output was on a downward trend in Romania in Q2 and in Q3 |
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| Eurostat, RBI/Raiffeisen Research |
Industrial activity recorded an unexpectedly very weak performance in Q3, the industrial output standing on a downward trend during July-September. Thus, after small monthly decreases in July (-0.9% mom) and in August (-0.4% mom), industrial output posted a large contraction of 2.0% mom in September. Given the negative monthly dynamics recorded in July-September, industrial output fell by 4.6% in Q3 as compared to Q2. The decline was fueled by significant decreases in all three segments of industrial activity (-7.3% qoq for mining and quarrying, -5.4% qoq for manufacturing sector, and -3.5% qoq for supply of electricity, gas, steam and air conditioning).
The weak performance of industry in Romania in Q3 fits the pattern observed in Germany (-2.4% qoq for industrial output) and most of CEE countries (Czechia: -1.7% qoq; Hungary: -2.0% qoq; Slovakia: -1.5% qoq). In all these countries, the decrease of production in the automotive industry amid global shortages of semiconductors and electronical components was an important factor that explained the poor performance of total industrial production. In Romania, the output in the automotive sector plunged by 12.6% in Q3 as compared to Q2, with a large monthly decline of 16.8% being recorded only in September.
The activity of manufacturing sector in Romania was strongly affected this year by the existing bottlenecks in the global production and distribution chains (the automotive industry being the most affected). Thus, the recovery of industrial production after the decline generated by the closure of the economy in March-April 2020 has proved to be very difficult. So, the volume of industrial output in September this year was 7.5% below its pre-pandemic level from February 2020. In addition, industrial sector in Romania underperformed when compared with its regional peers.
The large contraction in industrial output in Q3 suggests that the industry very likely made a negative contribution to the quarterly dynamics of real GDP in this quarter. Our current baseline scenario assumes an increase of real GDP in Q3 by 1.4% - 1.7% from Q2, respectively by 10.5% from Q3 2020. However, agriculture makes an important contribution to these rapid dynamics, our scenario assuming an increase in gross value added in agriculture by 30% in Q3 2021 compared to Q3 2020 (a quarter characterized by a very low level of agricultural production due to severe drought). Yet, we consider that GDP excluding agriculture is a better indicator to evaluate the performance of the Romanian economy, its evolution not being influenced by the large volatility of agricultural production. For Q3 2021, our baseline scenario assumes an increase in real GDP without agriculture by 1.2% compared to Q2 2021 and by 8.9% compared to Q3 2020. We consider that the large contraction of industrial output from Q3 amplifies the downside risks to our previous GDP forecasts for Q3, and also the downside risks to our economic growth forecast for 2021 (7.5%).
| Contraction of output in the automotive industry weighs on total industrial output |
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| Eurostat, RBI/Raiffeisen Research |
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Andreea-Elena DRAGHIA
Romania 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.
Nicolae COVRIG
Romania 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.
While there is a lot of uncertainty on the path to be followed by the annual inflation rate in the following quarters, there are more and more clues that underlying inflationary pressures have intensified and would remain elevated going forward. Headline inflation rate has a good chances to outpace 9% in the following period, although it is largely on a temporary basis and mainly as a result of large increases in energy prices. Central bank would focus mainly on the dynamics of core inflation rate, which we also expect to be elevated going forward. The central bank increased the key rate by only 25bp (to 1.75% from 1.5%) at its monetary policy meeting on 9 November. However, we believe that the monetary policy tightening cycle should continue at a sustained pace going forward. Moreover, we foresee an increase of the key rate by 50bp in both January and February, in order to reach a level of 3.5% by July next year. |