Both the evolution of inflation controlled by the BNR (adjusted CORE 2) and the “sequential” revision of the INS on the development of GDP in the third quarter upset the expectations of 9 members of the board of the BNR, according to the minutes of discussions. , published on Monday.

At the monetary policy meeting at the beginning of the year, the nine members of the BNR Board of Directors discussed the decline in consumer purchasing power, short-term employment intentions, which have decreased again, as well as the apparent decline in GDP growth in the 1st quarter of 2023. All from the perspective of inflation.

The CORE2 adjusted annual inflation rate (the one that is carefully considered by the NBR and which excludes from the calculation of the inflation rate prices on which the NBR has little or no influence: managed, volatile – vegetables, fruits, eggs, fuel ) resumed a slight rise, contrary to expectations central banks, increasing from 11.9% in September to 14.0% in November. However, the development may be short-lived, likely reflecting delayed or additional spending increases and profit margin adjustments in the context of relatively stable consumer demand, but is expected to moderate in the near term.

After the analysis, it was agreed that the increase in the annual rate of adjusted CORE2 inflation continued to strengthen and the continued shocks from the war in Ukraine, related sanctions and the prolonged drought last year.

The dynamics of the average net real wage remained at the same level significant negative level some members of the Council noted that they reflect a decrease in the purchasing power of consumers.

Economic activity in the third quarter of 2022 grew similarly to the previous three months – 1.3%, significantly exceeding expectations, but under the conditions of a consistent downward revision of statistical data on GDP dynamics in the period 2020-2022. It was concluded that the evolution makes likely a further increase in excess aggregate demand in this interval, contrary to expectations.

Conversely, compared to the same period last year, GDP growth continued to slow down in the third quarter to 4.0%, from 5.1% in the second quarter. instead of reamplifying as expectedwhile still being historically significant.

New monthly gains in employment in the economy in September-October 2022 were significantly lower than in the first half of the year, due to a reduction in the private sector workforce

Economic growth this time was supported mainly by investments and only secondarily by consumption of the population, while the dynamics of net exports again became strongly contractionary. As a result, the trade and current account deficit significantly accelerated its annual growth. The size and speed of the deepening of the external deficit in 2022 were recognized by Council members as particularly alarming, which also reflects competitiveness problems at the level of some sectors and companies.

Regarding the labor market, the Council members noted that the new monthly increases in the number of people employed in the economy in September-October 2022 were significantly lower than in the first half of the year, including due to a decrease in the number of people employed in the private sector.

However, in the third quarter, the growth rate of unit labor costs almost doubled, and the double-digit annual dynamics of unit labor costs in industry continued to grow relatively quickly, including in October, but in the context of the more unfavorable effects of high energy and raw material costs on productivity labor in this sector.

Intentions for short-term employment declined again in the last month of 2022, including in the context of uncertainty generated by the war in Ukraine and tightening financial conditions at the European and global levels, which also affected demand.

Beyond the near term, the ability of some companies to remain viable/profitable in a high cost environment will also be tested by the end of government support measures, as well as the need for technology, which may lead to new restructuring or bankruptcy of the company. At the same time, the labor market is likely to be more affected by the expansion of automation and digitalization within the country, as well as the growing appeal to workers from outside the EU.

The members of the Council assessed that the preservation in the near future of a relatively relaxed level of tension in the labor market, as evidenced by specific indicators, as well as high costs of energy and raw materials, likely to limit salary increases in the first months of this year, at least in certain segments. However, it was agreed that the high level of inflation requires careful monitoring of developments in the labor market in view of its chronic structural problems, as well as wage increases at the beginning of the year in the public sector, as well as in the private sector under the influence of a significant increase from January 1, 2023 the size of the minimum wage in the economy.

Developments point to still robust annual GDP growth in Q4 2022, but with a further marked decline in Q1 2023

The annual dynamics of loans granted to the private sector accelerated its decline, reaching 13.2% in November against 16.0% in September due to the further slowdown in the growth of the lei component. However, its impact was somewhat balanced by the continuation of high dynamics of lending in foreign currency.

New estimates point to a progressive slowdown in economic growth in the IV quarter of 2022-1 quarter of 2023 – under the influence of the continuation of the war in Ukraine and the expansion of related sanctions. Developments call for still robust annual GDP growth in the fourth quarter of 2022, but with a further marked decline in the first quarter of 2023, Council members noted.

According to high-frequency indicators, private consumption is likely to return in the fourth quarter of 2022 as the main determinant of annualized GDP growth, while a positive, albeit much more modest, impact is expected from gross fixed capital formation (investment), mainly due to construction activities, the members of the Council reported. In contrast, net exports may increase their negative contribution, as exports narrowed their annual fluctuations significantly in October 2022, and this was much more pronounced than imports.

However, the continuation of the war in Ukraine and the expansion of related sanctions creates significant uncertainty and risks for the outlook for economic activity, as Council members indicated in several speeches, highlighting the possibly greater impact this has on procurement. power and consumer confidence.

At the same time, the members of the Council emphasized the importance of attracting European funds, especially those related to the EU program “Next Generation”, which is conditioned by the fulfillment of clear goals and stages of project implementation, but is important for achieving the necessary structural reforms, including the energy transition, as well as for offsetting, at least partially, the contractionary impact of supply-side shocks exacerbated by the war in Ukraine and the strengthening of economic and financial conditions at the international level.