Colliers International Romania Mid-Year Market Update

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In the post-crisis period, Romania has been the most successful economic convergence story this part of Europe. In fact, if the service-led growth continues at a pace similar to the post-crisis period, Romania is likely to surpass Hungary by end-2022 and catch up to Slovakia by end 2028 in terms of GDP per capita, adjusted to purchasing power standards (this indicator is widely used as a proxy for living standards). 

Moving on to the current backdrop, as we (and other analysts) have been saying, the c.7% GDP growth rate 

we saw last year cannot be maintained and the anticipated slowdown is upon us. Some transitory factors weighed on GDP, leading to quasi-flat GDP readings in quarter-onquarter terms in 4Q17 and 1Q18, which is not something we considered. The important note here is that due to the way economic growth is calculated and the statistical relevance of these quarters, it is looking nigh impossible to achieve an expansion rate above 5% in 2018 (barring any exceptional past data revisions) and we would look for something along the lines of 3.5-4% for this year. That said, we would consider any print around the 4% mark as the country’s  “cruising speed” (similar to the so-called potential GDP growth rate), so still quite respectable and above the vast majority of EU states. 

The sharp ongoing monetary policy tightening (starting late 2017, with money market rates well over 2ppt higher since then), increased political noise and uncertainties about  fiscal policy likely weighed on consumer sentiment and contributed to the soft start of the year, alongside sluggish external demand. Still, as we said a bit earlier, we believe that this soft patch will not last too long as the main puzzle piece of Romania’s growth story remains more or less in place: the wage expansion rate is lingering in double digit territory (nearly 15% YoY in April 2018); in spite of inflation spiking to 5% in the first half of the year, a real wage growth of 9-10% is still quite respectable and likely to support decent private consumption going forward. In fact, retail sales have recovered nicely in April and May. 

Romania macro update

The major challenges for the Romanian economy going forward remain structural in nature (so more difficult 

to tackle), like building highways, cutting back red tape or corruption, increasing population activity rates and 

improving education. Take the labour market for instance: employers are finding it ever harder to fill in positions (both for white- and blue-collar positions), with unemployment near record lows of 4.4%. But the potential is there. For instance, by simply converging the activity rates and employment in agriculture to levels around EU averages, we estimate that more than two million people would enter the workforce, which would mean a huge boost given that Romania has around 6.4 million employees (including in the grey economy). This untapped reservoir is one of the reasons we would feel quite bullish about the medium to longer term outlook of the economy. As in the past, there are some potential headwinds on the horizon that could disturb the economy and are worth monitoring. Externally, this means the major central banks’ monetary policy tightening (the Federal Reserve is moving forward with this and the European Central Bank could signal higher rates starting 2019), alongside uncertainties fueled by US policies (either related to a global trade war or geopolitics), as well as the eternal headaches generated by Eurozone politics. Internally, we are closely watching for developments on the fiscal front (slippages risks), as well as for potential flare-ups in political noise.

Silviu Pop 

Head of Research

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