First Signs of Recession in Romania in 2020. Is the Government Able to Avoid It?

Romania was on a good economic trend before the COVID-19 pandemic. The GDP had been increasing for the last 3 years in a row and the country stood in top 3 by GDP growth in EU. Nobody could predict what was about to come and the estimates before the pandemic had shown GDP would grow with 3.8% in 2020 as well.

Q1 2020 showed Romania kept the GDP growth tendency, as it was one of the few countries to grow during the first three months of the year. Thus, Romania recorded a 2.7% GDP growth. Along with Romania, Lithuania and Bulgaria also recorded GDP growths, with 2.5% and 2.4% respectively.

We explained in a previous post why this happened: the Romanian GDP takes its ‘strength’ mostly from the private consumption. This is why the more people spend, the bigger GDP grows. And Romanians simply emptied the shelves in March, when the restrictions were about to be imposed, but also during the lockdown measures. The fear of having nothing to eat, a fear coming from the difficult years of communism, made Romanian buy food supplies like they were going to war.

Now, after the Romanian Minister of Finance took pride in the Q1 GDP growth, the first signs of recession appeared. The lockdown drastic measures imposed by the authorities and the reluctance of the Romanian Government in taking the necessary economic steps to help the Romanian entrepreneurs, all these hit the economy harder than any epidemic.

In fact, there are early sings of recession in Romania

The signs of recession are visible, but the Romanian Government is trying hard to hide this from population. The minister of Finance takes pride in the growth on the Q1, but he ‘forgets’ mentioning Romania crosses very difficult economic times in Q2, along other European countries.

Some of the early signs of recession in Romania already appeared. A recession is identified by a fall in GDP in two consecutive quarters. As the Q2 is already affected, it will be a miracle for Romania to avoid a decline in Q3 as well.

• according to the latest opinion poll, 40% of Romanians saw their earnings diminishing during the pandemic lockdown. It is a rather high percentage of people affected and this will significantly drop the private consumption, not only in Q2, but also in Q3 and Q4 as well
• around 1 million people are unemployed at the moment, lay-offed or on technical unemployment. Not many of them will return to work, as there are so many companies in difficulty. It means that not only the private consumption will decline significantly until the end of the year, but also the state revenues as well. The public jobs could also be affected and the number of Governmental posts could decline in this context.
• an independent study shows that, from those 29,000 Romanian companies with actives of more than $1 million, 50% already had difficulties before the crisis. Now, the study shows 70% of these companies might have difficulties. These companies can lay-off some of their employees, but some might consider closing their business for good in Romania and relocate in other countries.
• the interest for state guaranteed loans for companies in Romania is really high: more than 100,000 companies registered on the state-run platform, called IMM Invest (SME Invest), showing they urgently need capital to survive. From these applications, only a few hundred have already received loan approvals, a too small a number to say that the SMEs in difficulty will be able to survive this period.
• the national auto maker and Renault subsidiary, Dacia, registered a sales decline in Q1, but in April Dacia registered a decline of 50% on the domestic market and of 99% on markets like Italy or Spain. Romanian exports are seriously hit, as car manufacturing industry in Romania reached around $12 billion in 2019, more than double than the IT and software export value.
• the drought in Romania affected the crops, but mostly affected the exports. Romania exported cereals of almost $2.2 billion in 2019, now this value will diminish considerably. The drought affected almost 50% of the grain crops. This is why the Romanian Government took the decision of forbidding cereal exports during the lockdown, but they changed their mind and allowed them after pressures from the EU or from importing countries like Egypt.
• the GDP in Romania is expected to decrease with up to 7% in 2020, but there are worse estimations as well.

All these are early signs of a recession in Romania. It depends only on the Government to avoid a second consecutive quarter decline in Q3 after the economic decline in Q2. Yet, the Romanian Government doesn’t seem to eager to save the economy, but more concerned in conserving the voting intention for the governing party, the Liberals.