Romania Macro Outlook
We revised our economic growth forecast for 2018 to 3.8%, from 4.1%, after the release of the GDP breakdown for 2Q18. The growth structure was weak, with an unusual high contribution of inventories of 3pp to the growth rate of 4.1% and a decline of gross fixed capital formation, which subtracted 0.7pp from overall GDP in 2Q18. Data about investments disappointed, as it stopped a short and hesitant recovery of gross fixed capital formation that started in 2H17, not to mention here the high need of the Romanian economy for fresh investments. Risks related to the quality of the agricultural year, weaker consumer and business sentiment and monthly figures about industry and services changing frequently from strong to weak were other reasons for our decision to cut the 2018 growth forecast. Fiscal stimulus is fading gradually and economic growth rates are normalizing, while external risks related to the global trade war can only complicate the entire picture.
We foresee the inflation rate at 3.5% in December 2018, the upper limit of the NBR's target. Following the NBR's decision to keep the policy rate unchanged in August and taking into consideration the inflation outlook and external developments, we have revised our forecast for the policy rate in 2018. We now see the policy rate flat at 2.50% in the remainder of 2018 (the previous forecast was 2.75% in December 2018). The long end of the yield curve is vulnerable to external shocks and we think that the ongoing steepening process, with a rising spread between 5Y and 10Y yields throughout August, will continue. On the FX market, we favor the scenario of a slight depreciation of the leu.