​When the NBR worries about inflation (which it does), it raises interest rates to slow economic growth. If Iserescu raises interest rates too much, it will trigger a recession, i.e. a hard landing. If the Central Bank manages to raise interest rates enough to slow the economy and curb inflation, but not cause a recession, it means that it manages to land the plane smoothly. Provided that the prime minister will not make any sudden moves.

According to a report published on Monday by BRD, the current economic situation is unstable, and high inflation, tightening monetary policy and lower external demand could change the narrative to a soft landing of the economy.

We all would like a smooth landing of the economy, but, unfortunately, it depends not only on us and not even only on Iserescu.

The Central Bank’s inflation target is 2.5%, which would mean a doubling of prices every 28.8 years, a reasonable time frame to manage without too much stress. That’s right, the target will not be met this year, and most likely in 2024, for reasons that affect both us and our trading partners (where we import inflation from or where we export price increases).

“Some signals from the eurozone are not at all favorable for us,” BRD said in a report published on Monday. The process of reducing inflation will continue, but more slowly, say the authors of Monday’s analysis. According to them, the labor market looks good, although it has persistent structural problems.

The bad thing about inflation is that it takes a long time to return to a decent range. A recently published IMF study identifies more than 100 episodes of inflationary shocks in 56 countries since the 1970s. In only 60% of the episodes was inflation “resolved” within 5 years.

Many times, states “prematurely” celebrated the fall of inflation, which sometimes fell a little, then flared up again. Countries that managed inflation had tighter monetary policies that remained constant over time, lower rates of nominal wage growth, and less currency devaluation. Successful disinflation was associated with short-run losses in output, but not larger losses in output, employment, or real wages over a 5-year horizon

That’s right, the growth of real wages is again in the positive. but…

Correcting the fiscal imbalance proved to be a difficult nut to crack

Central and Eastern European central banks are starting to cut interest rates, a trend the NDB is likely to join later, given persistent core inflation, labor market tensions and uncertainty about fiscal consolidation, the paper said.

Eurozone GDP grew by 0.1% in the second quarter (from the first quarter) and by 0.5% from the second quarter of 2022. Major economies such as France and Spain posted positive quarterly growth, while Germany’s economy stagnated.

Under the pressure of high inflation, tighter monetary policy and falling external demand, our economy grew by a modest +0.9% (quarterly) or +1.1% (annualized). In the first 6 months, the growth was 1.7%, from unusual or atypical gap between raw and seasonally adjusted figures.

Long story short, we have flu symptoms, but for now we’re taking it easy. The growth of retail sales (the engine that supported the growth of the economy) barely managed to stay in the red in the spring.

According to BRD’s analysis, the slowdown in lending, the increase in bank interest rates and the increase in utility prices led to a decrease in consumption, especially in the area of ​​durable goods (especially furniture and electronics).

Industrial production also fell by 5.5% in the second quarter of 2023, with the decline spreading across all subsectors. The evolution in Romania corresponds to what is happening in the region: European industry is facing a loss of competitiveness due to global economic fragmentation and rising production costs.

Not so long ago, everyone was extolling the benefits of globalization. Now we also see the empty half of the same phenomenon.

Even the construction sector, which grew by a solid +13.4%, shows that this growth is due to engineering works on the background of large transport infrastructure projects, as well as works with heating, water supply and sewage networks.

In the Eurozone (our main economic partner), business sentiment (as measured by the Composite PMI fell to a 33-month low) and the services sector cooled due to industrial contraction.

As European firms become increasingly reluctant, they are delaying expansion and hiring. As for the German economy, for the fourth month in a row, managers there have expressed pessimism, and the key role here is played by the deterioration of the volume of new orders.

Fiscal correction – the size of the steps and their frequency are important. We don’t know anything yet, but we don’t have good results

Several things challenge the achievement of an otherwise ambitious fiscal adjustment roadmap: the size of the structural deficit, spending inflexibility, a changing macro-financial landscape — slowing economic growth, higher debt servicing costs or a multiple election cycle in 2024, BRD analysis shows

The government is working on and will soon announce a package of fiscal measures to support fiscal reform. We emphasize here the need for the pace and consistency of this package so as not to affect private demand and at the same time protect the most vulnerable sections of the population, say the authors of the analysis.

Minimum wage – beware of unwanted side effects

Politically attractive and touted as an anti-poverty mechanism, the minimum wage has been in the spotlight in recent years amid the cost of living. While proponents of raising the minimum wage tend to “sell” it as a win-win situation, it’s important to understand that economics is ultimately about trade-offs.

Decisions on raising the minimum wage should be carefully developed taking into account the features of the socio-economic context – competitiveness, labor productivity growth and employment prospects.

During an expansionary phase, the economy is able to absorb rising costs with little impact on employment, especially if minimum wage increases start from a low base.

But in a volatile and uncertain economic environment, rapid increases in the minimum wage can have consequences that harm the very people they are supposed to help.

The minimum wage should not be seen as a panacea for overcoming poverty, nor as a “guarantee” of a decent standard of living. While the “half” increase in the minimum wage seems immediate and obvious—it protects the living standards of low-wage workers—the long-term effects tend to be more subtle and detailed.

Regarding future decisions on raising the minimum wage, we see two concerns: 1) a relatively high ratio of the minimum wage to the average wage may cause several distortions in the labor market, including: reduced labor market entry opportunities, increased employment is weak for the unskilled and inexperienced workers, increasing difficulties in attracting highly qualified workers and lower productivity growth. The second risk is the formation of a wage-price spiral.

Given the high proportion of minimum wage workers in Romania, increases in the minimum wage tend to increase the impact of inflation on total wages.