RO: ESI up at the end of summer

Economic Sentiment Indicator (ESI) up to 104.1 in August vs 102.6 in July on more optimistic consumers and a boost in the morale for services and construction. Industry was almost flat in monthly terms and the sentiment worsen for retail trade. Looking at the EU wide index, the economic sentiment seems to be higher as well with a reading of 96.9 in August vs 96.5 previously.

With two months of 3Q24 in the bag, ESI averages lower this quarter versus the previous one which might suggest that the economy is slowing further down. As it currently stands the ESI averaged 103.9 in 2Q24 and it averages 103.4 two months into 3Q24. September can change the picture and will most lake be the deciding factor this quarter. Consumption has been in good shape so far this year and is expected to continue to do so for the remaining months. We expect it to be the main GDP growth driver this year. Investments most likely had a slow first half of the year but are expected to recover in the second half supported by state infrastructure investments and will also be a growth driver this year. Net exports, on the other hand, are expected to deepen their negative contribution as imports of goods accelerated considerably on the back of higher internal consumption and exports are still affected by sluggish external demand and the low competitiveness potential of Romanian goods on the international markets.

Our economic growth forecast for this year of +2.6% most likely will be revised down to around 2.0% after the 2Q24 GDP growth breakdown will pe released on 6 September. The flash estimate showed a disappointing growth of +0.1% q/q and +0.8% y/y in 2Q24 bringing the 1H24 growth to +0.7% y/y. Most of the monthly indicators including ESI were suggesting a more robust growth in the second quarter of the year. We anticipate that net exports and inventories dragged the annual growth down in 2Q24.

Manufacturing confidence came at -0.6 in August vs -0.7 in July recording the second consecutive month with an almost flat evolution. Managers reported weaker order books along with slightly better production expectations and flat inventories.

Services confidence went up to 7.1 in August vs 4.7 in July on improvements on all three components included for the headline calculation. Considerably better business situation and demand over the past 3 months most likely also determined a rise in optimism for the demand expected in the next 3 months.

Consumer confidence improved to -12.1 in August vs -14.7 in July and remained above the long-term average of -17.6. The general economic situation expected over the next 12 months improved slightly on better financial situation both past and future which also improved the odds of major purchases expected in the near future.

Retail trade confidence worsened and came in at 4.0 in August vs 7.5 in July as weak past business situation determined higher volume of stock currently on hold and a blue sentiment regarding future business.

Construction sentiment improved to -4.7 in August vs -5.5 in July, with better current order book evolution and better employment expectations.

Selling-price expectations decreased across the board in August. Consumers price expectations for the next twelve months were also slightly down this month.

Employment Expectations Indicator (EEI) decreased to 103.3 in August vs 106.4 in July with expectations higher only in the construction sector compared with one month ago.