Romania's GDP contracted by 10.5% y/y in Q2, and by 12.3% q/q, the statistics office INS announced, confirming the flash estimate issued on August 14.

The decline was broadly seen as softer than expected, while the sentiment about recovery is mixed: short term indicators such as industrial production and retail sales point to a rather quick resumption of activity while the health risks remain high. Furthermore, the government’s resources to mitigate the economic impact of the coronavirus (COVID-19) are evaporating and the country should embark on a fiscal consolidation path after the general elections to avoid a public financing issue.

According to the budget rectification unveiled in August by Finance Minister Florin Citu, the government envisages an economic contraction of 3.9% in 2020, softer than the estimates of the European Commission or the International Monetary Fund, which indicate an economic contraction between 5% and 6% for Romania.

In its turn, Banca Transilvania considers that the domestic economy has already entered the post-pandemic cycle, and forecasts the country's GDP will grow by an average annual rate of over 2.5% in 2020-2022.

"The evolution will be determined by the dynamics of productive investments, which will rise by 3% during this period, backed by the real financing costs remaining at a low level, the potential of the domestic economy and the implementation of measures adopted in the European Union: Next Generation and the multiannual financial framework 2021-2027," says Andrei Radulescu, head economist of Banca Transilvania.

As regards detailed Q2 GDP dynamics, the sectors of IT&C and construction provided certain optimism amid a generally bleak performance across the whole economy.

While the industrial activity and the sector of services for households (mainly HORECA) dragged down the GDP's annual performance by 4.6pp and 2.6pp respectively because of 20.4% and 22.9% drops in the value added they generated, the construction and IT&C sectors made positive contributions.

The added value generated by the construction companies expanded by 9% compared to the same period last year, resulting in a 0.3pp positive contribution to the GDP annual dynamic.

The IT&C sector generated 10.4% more added value contributing 0.6pp to the GDP dynamic.

On the GDP utilisation side, the gross fixed capital formation notably advanced by 1.8% y/y in volume terms, but this is unlikely to account for investments in production capacities but rather the acquisition of medical equipment and other expenditures aimed at mitigating the effects of the coronavirus pandemic.