Romania's Economic Slump Deepened Last Quarter With EU's 2nd-Biggest Drop

Romania extended its economic contraction to a seventh quarter with the second-biggest slump in the European Union after Greece as a tax increase and wage cuts sapped demand, pointing to a “sluggish” recovery in 2011.

Gross domestic product contracted 2.5 percent from a year earlier, compared with Greece’s 4.5 drop and a 0.5 percent decline in the second quarter, according to final data released today by the National Statistics Institute in Bucharest. The economy shrank 0.7 percent from the second quarter, when it grew for the first time since 2008.

Romania, which took an International Monetary Fund-led bailout last year, is missing out on Europe’s economic recovery because the government raised taxes and cut spending to qualify for the terms of the loan. The plunge in consumer demand means that the country will take longer to return to growth than others in the region, analysts said.

“The recovery will be pretty sluggish and very much slower than the pre-crisis levels,” Neil Shearing, an economist at Capital Economics Ltd., said in a phone interview from London. “The next couple of years will be very difficult for Romania because every country in the world is looking for an export- driven economy but not everyone can have one.”

Taxes, Wages

The government raised the value-added tax by 5 percentage points and cut public wages by 25 percent to narrow the budget gap to 6.8 percent of GDP this year and 4.4 percent in 2011, adding to the worst recession in 20 years. The economy will shrink in 2010 after plummeting 7.1 percent in 2009, IMF Mission Chief Jeffrey Franks said Nov. 1.

Romania’s recession erased the country’s 2008 economic expansion, when a credit-fuelled consumption boom made it the EU’s fastest-growing nation. Demand slumped an annual 1.9 percent and construction output plunged 13 percent in the first nine months of this year, the statistics office said.

Bulgaria, the Czech Republic, Hungary, Poland, Serbia and Ukraine posted growth ranging from 0.2 percent to as much as 4.2 percent in the third quarter.

The leu benefited less than other regional currencies from optimism the European Central Bank will act to stem the euro region’s debt crisis. Romania’s currency gained 0.1 percent as of 1:18 p.m. in Bucharest, compared with 0.4 percent for the Hungarian forint and 0.3 percent for the Czech koruna.

Romania’s “recovery continues to lag its regional peers due to the fiscal austerity and the ongoing restructuring of private sector, as consumption and investment fell again,” said Raffaella Tenconi, an economist at Bank of America Merrill Lynch in London, in an e-mail.

Tenconi cut her forecast for Romania’s economy to a 2 percent contraction this year, matching Shearing at Capital. In 2011, GDP may grow 1.5 percent, rather than the previous estimate of 2.5 percent, she said.

To contact the reporters on this story: Irina Savu in Bucharest at isavu@bloomberg.net; Andra Timu in Bucharest at atimu@bloomberg.net.

To contact the editor responsible for this story: James M. Gomez in Prague at jagomez@bloomberg.net

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