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2009 inflation target is in sight, by Lucian Anghel, BCR Chief economist

When I am writing these lines, National Institute of Statistics has not released yet the July inflation figures. However, annual inflation rate could deliver a positive surprise, my forecast indicating a decline to around 5% for the first time in the last two years.

The contraction of the aggregate demand with further effects upon food prices, the stability of the national currency with a direct influence upon foreign goods and some services and also the favourable evolution of the administered prices contributed to a considerable decline of the annual inflation rate in July. Although the disinflation trend might not be linear throughout the rest of the year, I see pretty high chances for the inflation target to be met at the end of December. Romania will avoid thus the inflationary recession predicted by some foreign analysts - a highly unpleasant scenario where negative economic growth goes hand-in-hand with strong and persistent inflationary pressures.

Inflation will continue to fall in 2010 supported, among other, by the gradual consolidation of the downtrend of inflation expectations. Higher unemployment, lower wages and weak lending activities will lead to a further contraction of the aggregate demand and, normally, to lower prices. In the end it's like in that old joke saying that a recession is when your neighbour losses his job while a depression is when you lose your job. Recession will finally affect not only our neighbours' the sentiment and propensity towards consumption, but also ours. I think households will scrap all unnecessary spending, focusing on bare necessities and also on long-term projects that deliver comfort and protection, like saving more money.

What is really important now for the Romanian economy is the opportunity for unpleasant but necessary structural reforms that could put the country on a better track in the long run, after the end of the crisis. We still have to do our homework in some key areas: increasing labour productivity strictly in line with wage growth, creating a more flexible labour market, enhancing the competition and also the supervision of consumer markets for a better quality of the products and services delivered to clients, increasing the supply of domestic goods for a lower dependence upon imports. And, very important, bringing agriculture in the front-line of the governmental priorities: higher public investments, strong support for foreign investments, incentives for increasing the average area of an agricultural holding in order to meet the European performance criteria. Reaching the Maastricht criterion for the inflation rate without a strong agricultural segment seems almost impossible even under normal conditions in light of the high share of food products in the CPI basket (almost 38%, nearly two times higher than in Euro Zone). The social costs of all these structural reforms could be absorbed more easily now, during recession and under an agreement with IMF and EU.

I am sure that Romania will return to economic growth by 2011 or 2012 and, most important, the differential between Romania and Euro Zone will remain significant, creating the conditions for a successful catching-up strategy. However, we should consider carefully the quality of this economic growth in order to avoid the accumulation of large macroeconomic imbalances like in the past. Romania should have an export-driven economic growth, with industry and agriculture in the first line, a strategy that could transform it into a high-income country over the next decades. The economic growth should not be accompanied by inflation and external deficits, this being a major test for the future economic landscape in Romania and an answer to the question whether we made the most or not of the opportunity of restructuring the local economy, including here the public sector.

Sursa: http://www.nineoclock.ro

Tags: growth economic romania inflation euro bcr

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