Domestic demand remained low in 1Q10

Households consumption decreased by 1.7% q/q due to higher unemployment (74,000 people lost their jobs in 1Q10, on average, as compared to 4Q09), lower wages and falling remittances of Romanians working in EU countries with economic problems like Spain and Italy (average monthly remittances stood at EUR 273mn in 1Q10 as compared to a monthly average of EUR 359mn in 2009). Government consumption shrank 0.9% q/q following the lay-off of some public employees at the beginning of 2010.

Gross fixed capital formation went up by 1.2% q/q. Exports were faster than imports (+12% as compared to +8.9%) and external demand was once again a key factor that lessened the extent of the economic decline.

The austerity package that will be debated in Parliament next week will hold back the recovery of domestic demand in the short run, but is a top priority for the government, in order to restore a sound fiscal position, free up additional resources for capital expenditures and improve foreign investors' sentiment. The consumer component of the Economic Sentiment Indicator released in May by the EC for the Romanian economy fell sharply to an all-time low of -56. It seems that consumers became increasingly worried about the financial position of their household after the announcement of deep cuts in public wages (-25%) and pensions (-15%) as of June.

The most recent data supports our view regarding a 25bp cut in the key rate to 6% at the next monetary policy meeting on June 30 if the global turmoil does not intensify.