RO: Rebound in manufacturing unlikely to be sustained

Industrial production increased by +1.1% m/m and limited its annual decline to -2.0% y/y in August vs -3.7% y/y in July. Actual data matched our forecast of -2.0% y/y.

We think that 2024 could be the second consecutive year of contraction for industrial production, with growth estimated at -2.0% after -2.5% in 2023. Cyclical developments related to easing energy price help a number of industries, but structural issues linked to eroded cost competitiveness continue to weigh on low value-added sectors. We expect industrial production growth at +3.3% in 2025.

Mining dropped -1.2% m/m and was flat in y/y terms, manufacturing increased by +1.7% m/m helped by the auto sector and declined by -2.0% y/y, while energy production was weak at -4.5% m/m and -4.7% y/y.

Some energy-intensive industries like chemicals, paper products and wood manufacturing continue to recover in August helped by cyclical developments related to easing energy price. Low value-added industries like textiles, wearing apparel and leather manufacturing remained deeply in negative territory due to structural issues linked to eroded cost competitiveness. Total manufacturing is still about 5.0% below its pre-pandemic level in real terms.

Confidence indicators show local manufacturing contracting further in September according to BCR Romania Manufacturing PMI. The index came at 47.3 in September vs 48.4 in August and remained below the neutral level of 50 for the third month in a row. Demand continued to be soft as shown by the evolution of the new orders component, which is also affecting the output and employment. The average PMI in the third quarter stood at 47.8, down from 51.2 in the second quarter.

Economic Sentiment Indicator shows local manufacturing confidence at -0.9 in September vs -0.6 in August. Managers reported almost flat order book levels, higher inventories and became more pessimistic about future production. The average index for manufacturing in 3Q24 stands at -0.8 vs -0.3 in 3Q24.

In September, the manufacturing component of the Ifo Business Climate Index for Germany fell to the lowest level since mid-2020. HCOB Eurozone Manufacturing PMI dropped in September and signalled a marked deterioration in the health of the Eurozone goods-producing economy.