NBR: Weaker purchasing power, lower hiring intentions, visible decline in GDP dynamics in Q1-2023

National Bank of Romania – Both the evolution of inflation controlled by the BNR (Adjusted Core 2) and the INS ‘consistent’ amendments to the evolution of GDP in the third quarter set expectations of the nine members of the BNR Board overturned. The minutes of the discussion published on Monday.

During meetings, the Board will make decisions on monetary policy based on data and analysis on current and future macroeconomic, monetary and monetary developments submitted by specialized departments and other available domestic and external information. Discussed and adopted.

Looking at recent inflation developments, Board members indicated that annual inflation fell from 15.88% in September to 15.32% in October before reaching a higher-than-expected 16.76% in November. rice field. Along with higher food prices, the main drivers of the increases observed during that period were higher prices of non-food commodities and market services, although fuel price dynamics may have registered a sharper decline. pointed out. , the overall contribution of the exogenous CPI component remains disinflationary, amid downward trends in oil and firewood price ceilings, the central bank said.

In contrast, the annual adjusted CORE2 inflation rate rose again slightly faster, unexpectedly rising from 11.9% in September 2022 to 14.0% in November 2022. This is a sub-component of food, given faster price increases across almost all non-food and service segments. However, in the context of consumer demand still being relatively strong, although expected to weaken in the near future, the evolution will probably be delayed or reflected in additional cost increases, and profit margin adjustments. It may be short-lived.

Following our analysis, the rise in the annual adjusted CORE2 inflation rate remains attributable not only to global supply-side shocks amplified and magnified by the war in Ukraine and related sanctions, but also to 2022 It was agreed that widespread drought was also to blame. Their direct and indirect inflationary effects are expected to rise in the first months of Q4-2022 due to high short-term inflation expectations, demand resilience in certain segments, and a large share of food and imports in the CPI. was also exacerbated by basket.

At the same time, however, industrial producer price dynamics for consumer goods in the domestic market have continued to moderately increase in the first two months of Q4-2022 amid a sharp decline in durable goods price changes. was observed. , economic agents’ short-term inflation expectations in industry, trade and construction resumed their decline towards the end of last year after a short period of stagnation. A new downward revision across the board through December was still above target volatility, but average net real wage dynamics remained significantly negative early in Q4-2022. , reflected the declining purchasing power of consumers, highlighted by some board members.

Regarding the cyclical position of the economy, Board members noted that economic activity in the third quarter of 2022 expanded at a pace similar to the previous three months, i.e., 1.3%, well above expectations, but statistical data were significantly weaker. Note that it has been revised downwards. GDP dynamics for 2020-2022. It was concluded that this development, contrary to expectations, would likely lead to a rebound in excess aggregate demand during that period.

In contrast, compared to the same period last year, GDP growth continued to slow in Q3 2022, dropping to 4.0% from 5.1% in Q2. Economic growth at that time was largely supported by gross fixed capital formation and slightly by household consumption, but the contribution of net exports re-entered significantly negative territory. The volume of goods and services significantly exceeded exports. As a result, the trade deficit and the current account deficit registered a fairly rapid annual pace of increase, even though the adverse difference between the low annual volatility of import prices and the annual volatility of export prices narrowed significantly. Board members see particular concern about the size and pace of the 2022 external deficit. This reflects competitiveness issues in some sectors and companies, alongside the significant impact of deteriorating terms of trade (which also has a significant impact on other European economies).

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