In September 2023, the industrial producer prices on the domestic market recorded an increase of 0.6% MoM and 1.5% YoY.

Yesterday, the Croatian Bureau of Statistics, DZS, released its latest report on the industrial producer prices, for the month of September 2023. According to the report, the producer prices on the domestic market recorded an increase of 0.6% MoM and 1.5% YoY. Price change excl. Energy amounted to -0.1% MoM, and +2.9% YoY.

Breaking the producer prices down by categories, on a monthly basis, producer prices increased in Energy by 1.9%, in Intermediate goods by 0.3%, they remained stable in Capital goods and Durable consumer goods, whilst they decreased in Non-durable goods, by 0.3% MoM. Meanwhile, on a yearly basis, the largest growth was recorded in Non-durable consumer goods, with 5.5%, followed by Durable consumer goods at 2.2%, Capital goods at 0.6%, and Intermediate goods at 0.3%, while the prices decreased in Energy by 1.1%.

Industrial producer prices YoY growth (January 2021 – September 2023, %)

Source: DZS, InterCapital Research

Furthermore, breaking the producer price change by industrial sections, on a MoM basis, producer prices increased in Mining and quarrying by 6.1%, in Electricity, gas, steam, and air conditioning supply by 0.5%, and in Manufacturing by 0.3%. On the other hand, they remained stable in Water supply; sewerage, waste management, and remediation activities (Water Supply). Turning our attention to the YoY basis, the largest price increase was recorded in Electricity, gas, steam, and air conditioning supply, at 11.3%, followed by Manufacturing at 1.8%, and in Water supply at 0.6%. On the flipside, Mining and quarrying costs decreased by over 50% YoY.

If we were to look at a longer time period, since 2015, total producer prices on the domestic market grew by 47.5%, while if we were to exclude Energy, the growth amounted to 17.6%.

Total industrial producer prices (PPI) growth, growth by categories (September 2023, 2015=0, %)

Source: DZS, InterCapital Research

As we can see in the graph above, by far the largest increase was recorded by Energy costs, which increased by 134% YoY. Other categories recorded between high single-digit growth, to growth just below 20%. Considering that the average inflation rate during this period is slightly above 28%, it would seem that the majority of categories excluding Energy increased way slower than inflation.

With the coming of colder weather and especially winter, there could be some more pressures on prices, especially in the Energy segment. However, the increase in energy prices should not be nearly as high as last year, as the situation on the market and in Europe in general has changed a lot since then. Still, continued price growth in the industry usually spills over to consumers in one way or another, as we’ve seen during the last couple of years, especially after the Russian invasion of Ukraine and the subsequent increase in energy prices.

According to the report by the World Bank, they estimate that the Romanian GDP will grow by 1.8% YoY in 2023. In this overview, we’ll go through the key points of the report.

According to the World Bank, Romania has made impressive improvements in its economic performance and prosperity over the past two decades, converging with the EU’s living standards. However, the country faces challenges, such as weak institutions, a shortage of skilled workforce, poor connectivity, and low resilience to natural hazards, among others. Furthermore, the country faces a constantly high at-risk-of-poverty rate, compared to the EU peers with similar or lower per capita incomes. This could further worsen due to ongoing inflation, especially among lower-income groups. In fact, according to the Bank, a 3.1 p.p. inflation gap existed between Romania’s lowest and highest quintiles.

Work will have to be done on improving this situation, and they remain the key short-term challenges. Achieving a sustainable recovery and supporting fiscal consolidation efforts will depend on implementing structural reforms in key areas, including education and health sectors, public administration, tax, and pension systems, and finally, the decarbonization reforms along with efficient use of EU funds.

In H1 2023, Romania’s GDP grew by 1.7% YoY, mainly supported by private consumption which grew by 3.9% YoY, due to higher wages and stable levels of unemployment. Investments also supported GDP growth, increasing by 11.2% YoY, supported by the EU funds. Changes in inventories had the largest negative impact on the GDP. In spite of weakening export volumes, trade and current account deficits narrowed, supported by higher services surplus and modest import compression. Construction growth continued at 6.8%, albeit this represents a slowdown both in residential and non-residential constructions. Industry continued to decline, at -3.3% YoY, due to elevated production costs, especially in the energy-intensive sectors.

Moving on to the outlook, the growth is projected to decelerate to 1.8% in 2023. In 2024 and 2025 however, it is expected to pick up again, estimated at 3.7% and 3.9%, respectively. The main drivers of this growth would once again be private consumption as well as EU funds’ aided investment. This outlook depends on several factors, including the extent and duration of the war in Ukraine, as well as its repercussions on the European economy, combined with the fluctuations in global prices and domestic inflation. Furthermore, Romania’s ability to efficiently absorb the EU funds will be critical for future growth.

On the other hand, the fund-associated structural reforms will also be critical for supporting a sustainable reduction of the fiscal deficit over the medium term, particularly aimed at reducing inefficient expenditures and strengthening revenue mobilization. Furthermore, improvements in life-long skill formation and private capital mobilization will also play a crucial role in boosting potential growth. Because of the growth slowdown, 2024 may see slower poverty reduction. However, the poverty trajectory will hinge on the duration of the war in Ukraine and its impacts on food and energy prices, as well as the approach to tackling the fiscal deficit while protecting the poor. As such, the Government’s role in mitigating energy cost effects through targeted support is vital.

The entire report can be accessed here.

World Bank current key indicators and forecast for Romania (2022 – 2025, %)

Source: World Bank, InterCapital Research