Romania’s economy seems to be good shape at the moment. General business-activity is picking up and real-estate is coming back. In plus, public-sector wage hikes, several tax cuts, low interest rates and cheap fuel prices are currently boosting consume – whether it’s on new cars or at Carrefour. Sales of the French retailer in Romania rose by 13.6% in 2015.
Economists would describe this situation as a ‘cyclical upswing’. And I would argue, that romanians have all the right to enjoy the moment after a few harsh economic years from 2008 to 2011.
Although this ‘cyclical upswing’ will not change its course immediately, it’s in the nature of cycles that a boom is followed by a bust. And there are many early warning signs of a new storm brewing over Romania.
These storm-signs are of structural, global and local nature:
Structural warning signs
Every single day, Romania’s economy is importing more goods and services than it’s capable to export abroad. This difference in value is called ‘trade deficit’ (if exports are higher than imports, the term is ‘trade surplus’). According to the last official numbers available (for January 2016), Romania’s trade deficit is 13 million EUR – not for the whole month, but daily.
One effect of a high trade-deficit is that it drives the value of the currency down, making it more costly for romanian consumers to purchase imports. To pare the losses of the local currency, central banks usually hike the key interest rates, which in turn makes housing more expensive – and gone is the consumer-driven ‘upswing’.
Global warning sings
The name might be unfamiliar to most people outside the financial circle. ‘Bank of International Settlements’ (BIS), headquatered in Basel, Switzerland. The BIS is also called the ‘central bank of central banks’. So it could be important to listen, what the BIS has to say. In its latest quarterly report – released in March 2016 – the BIS sent a clear warning, that the ‘uneasy calm’ of previous months had given way to ‘turbulence’. BIS chief Claudio Borio addressed the tension between the markets’ tranquillity and the underlying economic vulnerabilities. ‘We may not be seeing isolated bolts from the blue, but the signs of a gathering storm that has been building for a long time,’ he warned.
Disruptions started late 2015 with the first post-crisis interest rate hike by the US Federal Reserve and accumulating signs of a slowdown in China. The second phase of turbulence began early 2016 with negative interest rates in Japan and the Eurozone, that should be viewed as a clear warning about the bad shape of global banks. Another negative global sign is for instance the real estate bubbles popping up – this nota bene amid general weaker economic growth – around the world from Sydney and San Francisco to London and Beijing.
I guess, I don’t have to go into the details of the consequences of a bursting property bubble – this is very well known specifically in Bucharest. That brings us to:
Local warning signs
To successfully manage or steer an economy through the cycles is a task not even achieved by governments who don’t have to care about the next elections as China is currently demonstrating.
For the Romanian government seeking re-election, it’s almost impossible. Nonetheless it’s common among politics in the run up to elections to implement new laws to please voters – as the bill that would allow buyers to walk away from mortgaged properties and stop paying loans or short-viewed stimuli on wages or taxes. But this damages the long-term success of the entire economy.
The IMF-Delegation – who just finished their visit in Bucharest – is exactly warning about this potential risk for Romania’s economy: ‘The 2016 budget gives stimulus when consumption growth is already strong’ the IMF stated. Consequence: Romania’s budget deficit would reach 3,3% of GDP, thereby overshoot the European Union’s ceiling (3,0%) unless the planned tax cuts were postponed.
It’s not hard to predict, that the honey of a tax-cut is most probably too sweet for the parliament in Bucharest to postpone it ahead of elections, although it would be better to delay this measure for now and implement later when times a harsher again.
The focus on short-term political gains on the cost of a responsible long-term view is often the beginning of the end of sunny economic times – and this makes room for the next economic storm to brew over Romania.
Mounting signs of an upcoming storm for the global – and local – economy.