Currently, the economic sentiment in Romania is down to the lowest level recorded in the past two years. The Economic Sentiment Indicator (ESI) weakened in February driven by a sharp drop of confidence in the industry, ING Romania’s Chief Economist Ciprian Dascalu points out in an analysis.

The most important component, namely confidence in the industry, Dascalu notes, eased further from its highest levels post-GFC reached in December due to sharply lower expected production and increasing inventories, despite some improvement for order book levels. Next, services, the index’s second most heavily-weighted component, posted an improvement in confidence driven by better than expected business over the last three months, even as expectations for the three months ahead softened.

According to Dascalu, the weakening of the ESI is an indicator that the GDP will experience a weaker growth. Consumer confidence declined further albeit at a slower pace, he notes, amid an expected deterioration of the financial situation, negative job prospects and lower saving capacity, with a small improvement in the general economic outlook. The recent deterioration in consumer sentiment is the result of higher interest rates, depreciation of the local currency and fiscal uncertainties, he concludes.

In February, confidence in the construction and retail sectors was also down, with these sectors seeing a pull-back in price expectations as well, likely due to softer consumption. Nevertheless, price expectations for the other components in the ESI continued to grind higher, suggesting more to be done by the central bank to contain the inflation expectations, he notes.

According to Dascalu, the higher rates are already affecting the price expectations for the most vulnerable sectors. With soft data pointing downwards, the risk balance is tilted to the downside for our above-consensus GDP growth call of 4.7 percent for 2018 versus the 4.1 percent Bloomberg median. Moreover, with even more optimistic assumptions behind the state budget plan for this year, it is unlikely that public investments will offset the expected slowdown in consumption. The opposite is more likely, the ING expert concludes.

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