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Erste Bank’s Analysts : Romania likely to avoid technical recession in 2020

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Romania is likely to avoid technical recession this year, as the gross domestic product (GDP) is expected to recover in the third quarter after a strong contraction in the second quarter, Austria's Erste Group said on Friday.

Romania's GDP is expected to grow by a quarterly 5.9% in July-September and by a quarterly 2% in the last three months of 2020, Erste Bank said in an analysis. 

Romania's economic output shrank by 12.3% in the second quarter of 2020, compared to the first quarter.

Analysts reaffirmed their full-year GDP forecast of a 4.7% GDP contraction in 2020, which has been unchanged since the beginning of the COVID-19 crisis. Romanian finance ministry analysts said last month that Romania's economic output will fall by 3.8% in 2020, revising their previous forecast for a 1.9% annual contraction due to expectations of worse than originally projected performance across sectors. 

According to Erste, the outlook for 2021 depends heavily on the fiscal policy stance after the general elections and subsequent measures to bring the budget deficit under control and avoid rating downgrades.

The bank recently revised upwards its Romanian economic growth forecasts for 2022-2024 by 1.2-1.4 pp to 3.7%, 4.7% and 5.3%, respectively, to account for larger inflows of EU funds. 

In terms of monetary policy, analysts said that expect Romania's central bank to ease the policy stance by initially cutting reserve requirement ratios  for liabilities in lei, followed by loosening liquidity management and perhaps asymmetric changes in the standing facilities corridor.

"The amplitude and timing of the monetary policy easing is likely to be correlated with the size and pace of fiscal consolidation. Political noise ahead of local and general elections, which are both due by year-end, should delay monetary policy accommodation," Erste said. 

On August 6, Romania's central bank decided to cut its monetary policy rate to 1.50% from 1.75%.

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