The latest data released by the National Institute of Statistics (INS) show that Romania’s economy accelerated in the second quarter: up 5.9% y/y, the strongest performance since Q2 2016.

Domestic demand contributed 7.3 percentage points to this growth, supported by an accommodative policy mix. Household consumption rose 8% y/y, underpinned by higher incomes, faster RON lending and a positive backdrop in the real estate and financial markets.

Fixed investment increased by 2.4% y/y in Q2 2016, after three consecutive quarters of decline. This improvement was driven by the impetus from exports, faster domestic consumption and low financing costs.

Government consumption and companies’ inventories also made positive contributions to Q2 GDP growth: 0.3 percentage points and 1.3 percentage points, respectively.

Net external demand, however, deteriorated in Q2 as exports slowed to 6.6% y/y, below the pace of imports (9.5% y/y).

As a result, in the first half domestic GDP was up 5.8% y/y, driven by domestic demand, supported by low financing costs and pro-cyclical fiscal, budgetary and income policies.

Household consumption (the main component of GDP) rose 7.7% y/y, while government consumption advanced 3.2% y/y.

Fixed investment grew in the first half of the current year, but at a slower 1.1% pace, amid tensions in the public arena and a build-up of risks to medium-term macro-financial stability.

Inventories also made a positive contribution to economic growth in H1 (0.8 percentage points).

By contrast, net external demand did not support GDP over January–June, as exports grew 8.7% y/y, below imports (10% y/y).

On the supply side, IT&C posted growth of 12.7% y/y in the first six months of the year.

There were also sizable increases in wholesale and retail trade; motor vehicle and motorcycle repair; transport and storage; and HORECA (8.1% y/y), and in professional, scientific and technical activities and administrative and support services (10.6% y/y).

Industry grew 7.3% y/y, and agriculture posted a 2.3% y/y increase in January–June 2017.

By contrast, construction fell 4.7% y/y in H1 amid a challenging investment climate.

In the short term we expect the annual pace of GDP growth to slow, influenced by the prospect of higher financing costs, tensions in the public arena and a deterioration in macroeconomic balances.