The Romanian Minister of Finance flooded the social media channels with sponsored posts boasting this ‘miraculous’ result while 1,2 million Romanians are on technical unemployment benefit or even lost their jobs altogether.

On the opposite, France registered a decline of 5.4% and Italy a 4.8% decrease in GDP, but also Spain and Germany declined as compared to Q1 2019.

Why the less competitive economies grow while the most performant ones decline in terms of GDP during lockdown?

The explanation is very simple, but few know it. The key is…

…GDP structure

GDP, or Gross Domestic Product, comprises of the following four main components:

• private consumption
• private investments
• public expenditures
• export – import

All these, added, result in the GDP of any particular country. So, the equation looks like:

GDP = Private consumption + Private investments + Public Expenditures + (Export-Import)

Now comes the most important question:

How much does private consumption account for in GDP in different countries?

This is the most important question when judging the performance of the GDP in each country: how much does the private consumption accounts for in GDP?

In Romania private consumption accounts for 62-63% of the GDP, the highest percentage in the region, even compared to 60% in Bulgaria in Lithuania, or 46% in neighboring Hungary. Romania is the European unwanted champion of the percentage of private consumption in GDP.

As comparison, the developed countries have smaller percentages: France has 53% and Germany 52%. In these economically developed countries GDP takes more from private investments and exports than the developing countries such as Romania.

What happened with the private consumption during COVID-19 lockdown?

In Romania, but also in other countries, population began making food and necessity goods stocks. From flour to water, from canned fish to sunflower oil, the food disappeared from the store shelters and along with it the internal consumption skyrocketed.

Moreover, in Romania there happened something else, something having social dimensions: Diaspora came back home and starting spending big time.

1,3 million Romanians from abroad came back home in 2020, because they lost their jobs in the Western countries. It means that billions of USD entered the country and started being spent during these months. As the private consumption weighs so much in GDP in Romania, there is a good chance we would see a GDP growth in Q2 as well.

Instead of conclusion: private consumption does matter for GDP, there’s no miracle here

All the countries which rely their GDP mostly on private consumption had a justifiable growth in GDP in Q1. Moreover, Romania, which witnessed the return of 1.3 million Romanians, could even see an increase in GDP in Q2 as well. This doesn’t mean that Romania will be able to have the same growth in Q3, but on the contrary.

The unemployment, the lack of private or state investments, always hit the economy and the purchasing power of population on a medium and long term.

There is no miracle happening here.

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The news shows the Romanian economy stays strong in a difficult international context. The economic and financial war between USA and China, the China slow down because of coronavirus problems, the Western Europe countries’ economies slowing down because of decreasing demand for their exports, all these create a difficult environment for the global economy.

We can say that Romania’s economy performs well in these conditions, but, as specialists say, the GDP ‘explosion’ of 2017, 7.1 percent, is a performance Romania will find harder to repeat.

The country met an unprecedented economic growth in the last 3 years, with 7.1 percent in 2017, 4.2 percent in 2018 and 4.1 percent in 2019. Yet, as some critics say, the initial estimate for the last year was 5.5 percent, which proved to be an unrealistic expectation after all.

With a 4.1 GDP advance in 2019 Romania is for the third year in a row in the top European countries by GDP growth, along with other former communist bloc members, such as Hungary or Poland.

Domestic demand will also be the engine for the economy in 2020, as National Bank of Romania estimates, but Romania is expected to also perform in IT and agriculture, two of the sectors which bring each year more than USD 5 bn from exports. Along with these, car production is expected to contribute to a very good 2020, when European Commission estimates the Romanian GDP will advance with 3.8 percent.

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The fears of a technical recession appeared last year after the Germany’s economic growth slowed down significantly. In fact, Germany’s GDP registered, in 2019 Q2 a decline of 0.2% compared to the previous period, while in 2019 Q4 it had 0% growth comparing to Q3. Other countries which slowed down their GDP growth in 2019 were also Italy and France.

The countries who performed in terms of GDP growth in the 2019 Q4 were Hungary, with a growth of 4.6%, followed by Romania, with a growth of 4.2% and, with 3.5%, Poland and Bulgaria.

Romania has thus registered the third year in a row with a growth of its GDP, an economic performance. The economic forecasts of the European Commission for Romania in 2020 show a growing GDP, with 3.8%.

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Year after year Romania has grown more, not only in GDP, but also in purchasing power of its citizens. Moreover, the economy has become a strong one and Bucharest Stock Exchange Index, BET, ranked on the 3rd place in the world in 2019 by its growth!

Now, International Monetary Fund makes an economic prediction which might come as a surprise for most, but, taking into consideration Romania’s economic performance, it isn’t: in 2020 Romania will overgrow Turkey in terms of Purchasing Power Parity, and in 4 years it will reach both Greece and Russia.

More exactly, IMF predicts in 2020 Romania will have a GDP per inhabitant of 29,554 international USD, while in 2024 Romania will have, exactly as Greece and Russia, a GDP per inhabitant of 36,000 international USD.

At the moment, Romania has overgrown Croatia and Bulgaria regarding GDP per inhabitant in respect to the other European Union countries.

Photo explanation: the statue of Stephen the Great, one of the rulers of Romanian province Moldova, whose greatest accomplishment during his reign was opposing the Otoman Empire’s expansion between 1457–1504. He is praised by all Romanians for this and the Romanian Orthodox Church canonized him and made him “Stephen the Great and Saint”.

As opposed to what happened in the past, the history has changed and now Romania and Turkey have one of the closest economic relationships ever, with trade exchanges estimated at USD 7 billion a year. Yet, overgrowing Turkey in terms of GDP per capita would be an outstanding economic performance for Romania, an ex-communist state.

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