Members of the National Bank of Romania’s Council discussed, in Wednesday’s monetary policy meeting, the fact that economic growth rate in Romania has seen a strong decline compared to last year.

The BNR Council also noted that private consumption continued to be the main driver of economic growth and that it even slightly grew its contribution as a result of the unexpected rise in its annual dynamic. The second factor was the stock variation, which had the highest contribution to the GDP of the last five years, while the gross formation of fixed capital has again turned negative on the background of a new contraction of this component on a yearly basis, after three consecutive quarters of growth. These aspects are concerning when it comes to the economy’s potential to grow on the medium term, the Council warned.

The contribution of net exports to GDP growth has remained negative, but did slightly decrease, in the context of a more evident deceleration of imports’ growth rate compared to the growth rate of exports. Current account deficit was slightly down compared to Q2 2017, due to the more balanced primary incomes.

The BNR noted that statistics indicate a higher tension on the labour market in Q2. The unemployment rate had another quarterly drop, reaching a historical minimum of 4.2 percent in May, which remained unchanged until July, while the vacancy rate increased for the second consecutive quarter.

The number of employees in the economy continued to reach new highs, and its annual dynamic stopped the downward trend in July as the indicator slightly increased in the private sector, for the first time since Q1 2017. The Council members concluded that pressures on employees will continue to grow in the near future, as hiring intention in Q4 2018 will improve according to specialized surveys and the growing difficulty in the recruitment of skilled labor. In this context, the Q2 speeding up of the gross average wage growth was pointed out, as well as the two-figure growth that was maintained in July despite a slight slowdown.

Another factor noted by the Council was the growth of the annual variation of unitary salary costs in industry for the second quarter in a row, albeit followed by a notable drop in July.

The yearly growth of private sector credit remained robust in July and August, at 6.6 percent – a value only marginally below the Q2 average and slightly higher than the Q1 average.

Council members agreed, based on the most recent analyses, that the annual inflation rate will continue to decrease in the following period in line with the medium-term prognosis published in August 2018, which had anticipated a 3.5 percent inflation rate in December 2018 and 2.7 percent at the end of next year.

On the other hand, the inflation rate did not decrease as much as initially expected due to the unexpected growth in the price of electric energy and oil in August. Oil could continue to surpass expectations in the near future, and so can certain prices for food products, in the context of the swine fever epidemic, the evolution of certain grains on the international market and the sudden deterioration of weather conditions in September. If such scenarios were to occur, inflation predictions would risk being dismantled.

According to the BNR, although private consumption continues to be the driver of economic growth in Q3, it is starting to slow down.

Based on the mixed signals recorded lately, Council members noted that the uncertainties and risks regarding the latest medium-term inflation prognosis remain significant. They also addressed the relative volatility of consumer confidence, which has re-entered an upward trend, as well as the probable evolution of the population’s real disposable income as more tension appears on the labor market, together with the potential growth of fuel and utilities costs. Other issues cited were the low EU funds absorption and the low public spending on investments.

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