The speed and path of the economic recovery are uncertain, conditional on the evolution of the COVID-19 pandemic and the associated restrictive measures, as well as on the economy's response to fiscal and monetary stimuli, according to the minutes of a monetary policy meeting of the board of the National Bank of Romania (BNR) of August 5, 2020."Turning to the future developments in the cyclical position of the economy, it was shown that the new assessments reconfirmed the magnitude of the anticipated downturn for this year, showing also a relatively stronger economic recovery in 2021, amid the gradual relaxation of physical mobility restrictions and influences from government support programmes and monetary conditions, together with the effects from the gradual restoration of external demand. The outlook indicated as likely the somewhat faster closure of the large aggregate demand deficit opened suddenly in Q2 and the return of the output gap to positive territory right from the start of 2022, slightly earlier than previously anticipated. The speed and path of the economic recovery were, however, uncertain, conditional on the evolution of the pandemic and the associated restrictive measures, as well as on the economy's response to fiscal and monetary stimuli, Board members concluded. Still, some Board members deemed that the widespread re-imposition of drastic social distancing measures was little likely and that the degree to which economic agents adapted to the health crisis could rise."
BNR remarks that the recent resurgence of the pandemic was likely to fuel in the short term the uncertainties surrounding household consumption - expected to regain in 2020 Q3 almost half of the ground lost in the previous three months, but to increase gradually later, so that its annual dynamics were seen to return to positive territory in 2021.
"The developments in real disposable income would be the key driver, which could be impacted by higher-than-expected growth of social transfers, but also by the effects of a relatively sharper worsening of labour market conditions, especially after the withdrawal/reduction of government support schemes. Two-way influences would also be felt by consumer confidence, which was assumed to be gradually recovering, given the probable persistence of concerns over the pandemic and over jobs and income prospects, likely to preserve, in the short run, the consumer behaviour changes emerged in the pandemic context, as well as the shifts in the structure of the consumer basket."
BNR mentions that the current epidemiological situation also added to the uncertainties surrounding the future evolution of investment, which was expected to recover at a slightly faster-than-previously-foreseen pace both in H2 2020, after the second quarter's massive contraction, and in the course of next year, also in light of the recently launched or approved government programmes.
"(...) it was shown that the recovery dynamics were conditional on the evolution of consumer demand and external demand, implicitly on the restoration of global production chains, but also on corporate income/profits and investor confidence, as well as on the speed of recovery of the home countries of foreign investment - all potentially hit for longer by the resurgence of the pandemic. Moreover, it was noted that, given the very limited fiscal space, the sustained growth of public investment in a more remote perspective depends on the absorption of EU funds, characterised, however, by a modest historical performance," according to the BNR minutes.
According to BNR, the slight upward adjustment in the annual inflation rate in H2 2020 was attributable to the action of supply-side factors, reflecting chiefly base effects and the upward correction in oil prices.
The action was expected to be more moderate than in previous assessments, given the decline in electricity and natural gas prices starting July 1, 2020, amid market liberalisation, which could be even more pronounced than that foreseen, as some Board members noted. By contrast, it was deemed that higher-than-expected opposite influences might stem from disruptions in production/supply chains and costs associated with infection prevention measures, but also from poorer harvests of some crops and from the price-setting behaviour of some economic agents - all likely to affect core inflation developments.