BMI View: A slowdown in private consumption, which we have started to witness at the end of 2016, will carry over into 2017, as inflation returns to the market. Despite the drop-off, consumer health is still in a strong state with low unemployment and rising wages indicating that Romania will be one of the outperforming consumer markets in Europe over the next year.
While economic growth in 2017 will remain strong by regional standards, it will ease somewhat to 3.4%, down from 4.2% in 2016. We expect domestic spending to ease after a recent strong performance as a number of cyclical factors fade out. 2016 represents the high water mark for real private consumption spending growth, which we estimate to come in at 8.6%. For 2017, our real private consumption expectations of 4.6% is down from the years of 2014-2016, but this is still one of the fastest rates in the Europe region on the back of strong fundamentals and a positive consumer story.
2014-2016 saw a boom in consumer spending growth driven by low global energy prices, tightening labour markets and weak inflation. We have long argued that strong domestic demand and recovering commodity prices will see inflation rise faster than consensus expectations and as such, we see inflation starting to return in 2017 at 1.5%, up from deflation of -0.5% in 2016. An average of 1.5% for the year is still a low mark, and thus real wages will be bolstered.
|Rising Inflation Will Ease Spending Growth|
|Romania - Inflation Vs. Consumption|
|f=BMI forecast. Source: National Sources/BMI|
Our view for strong consumer fundamentals is evident from the state of the labour market, where we have seen unemployment fall and wages rise. Unemployment is low - standing at 5.9% in September 2016 - the lowest rate since December 2008, as the number of employed persons has increased consistently since 2011. Meanwhile, the latest figures from Romania's National Statistics Institute (INS) show that net wages rose by 14.2% y-o-y in September 2016, from 8.0% y-o-y compared to September 2015. This upward pressure on wages will continue given falling spare capacity in the labour market, as job vacancies have declined during 2016.
Further to this, in May 2016, the government implemented a 19% increase in the minimum wage. On top of this pay increase, VAT for food was lowered from 24% to 9% in June 2015. The overall VAT rate was lowered from 24% to 20% in January 2016 and will be lowered again to 19% in January 2017. We highlight that successive tax cuts will bolster consumer confidence and free up further disposable income for discretionary spending over the coming quarters.
|Wages Rising As Unemployment Falls|
|Gross Industrial Wages Index, 2010=100 & Unemployment Rate (%)|
As net wages have continued to rise year-on-year since 2011, this has helped pull up consumer confidence and retail sales growth over the same period. Retail sales growth increased by 11.1% y-o-y in September 2016 with Consumer Confidence at -20.0, a strong recording by historical standards, but a noticeable slowdown in the past three months. While Consumer Confidence is in negative territory (0 is neutral, -100 extreme lack of confidence, 100 extreme confidence), it has never recorded a positive reading since it started being measured in 2001. Its September score is therefore a strong performance by historical standards, however, sentiment has dropped off since the first three months of 2016.
Retail sales recorded a 19.5% increase y-o-y in March 2016, the highest growth rate in the past five years and averaged 16.8% y-o-y increase, in the first half of the year. This spending supports our forecast for private final consumption in 2016 to record its highest growth since 2007. In the July-September 2016 three month period, we have already started to see the impact of a slowdown in retail sales growth, which will continue into 2017 in line with our forecast for a return to inflation. For example, gasoline prices have started to rise, from USD1.12/litre in January 2016 to USD1.23/litre in September 2016, boosting inflation in H216 and into 2017.
|Rising Wages, Confidence Drive Spending|
|Retail Sales & Net Wages, % chg y-o-y, Consumer Confidence Index|
|Source: INS, BMI|
The Romania Retail Report has been researched at source and features BMI Research's independent assessment and forecasts for the retail sector. The report examines key drivers of retail sales growth and future prospects, including consumer spending and private sector investment.
BMI's Romania Retail Report also examines the level of development and potential for growth of the retail sector, the commercial initiatives of major players, changing consumer demographics that influence demand and the regulatory environment. Key sub-sectors include mass grocery retail, autos, over-the-counter pharmaceuticals, computers and consumer electronics.
- Benchmark BMI's independent retail industry forecasts for Romania to test other views - a key input for successful budgeting and strategic business planning in the Romanian retail market.
- Target business opportunities and risks in Romania through our reviews of latest industry trends, regulatory changes and major deals, projects and investments.
BMI Industry View
Summary of BMI’s key forecasts and industry analysis, plus a discussion of major industry developments and a snapshot of key short-term demand-driving macroeconomic movements.
Industry SWOT Analysis
Analysis of the major Strengths, Weaknesses, Opportunities and Threats within the retail sector and within the broader political, economic and business environment.
BMI Industry Forecasts
There are four separate 5-year forecast modules in the retail reports. These are:
- Headline Retail Forecast: Total household spending (local currency and USDbn, % growth, % GDP, per capita, per household), spending by retail sector (food & non-alcoholic drink, alcoholic drink, clothing & footwear, housing & utilities, furnishings & home, health, transport, recreation, education, restaurants & hotels, personal care & insurance (local currency and USDbn, % growth, % GDP, % of total spending)
- Retail Sector Forecast: Breakdown of Food, Non Alcoholic Drink, Alcohol, Tobacco, Clothing, Footwear, Household Goods, Furnishings, Appliances, Glass and Tablewear, Household Textiles, Consumer Electronics, Garden Toys and Pets, Home and Garden tools, Personal Care, Personal Effects Spending (USDbn, % Growth)
- Household Income and Numbers Forecast: Number of Households (‘000, % growth); gross income per household and per capita; net income per household and per capita; tax and social contributions per capita; breakdown of household incomes – USD5000+, USD10,000+ USD50000+ (‘000, % of total); labour force, employment and unemployment (‘000, % change)
- Demographic Forecast: Total population; Babies 0-12 months; Young Children 0-4yrs; Children 5-9yrs; Young Teens and Older Children 10-14yrs; Older Teens 15-19yrs; Adults 21yrs +; Young Adults 21-29yrs; Middle Aged 40-64yrs (‘000, % growth, male, female); Urban Population (‘000, % population); Rural Population (‘000, % population).
BMI’s Retail Risk Reward Index
BMI’s Risk Reward Indices provide investors looking for opportunities in the region with a clear country comparative assessment of a market’s risks and potential rewards. Each of the country markets are scored using a sophisticated model that includes more than 40 industry, economic and demographic data points to provide indices of highest to lowest appeal to investors, with each position explained.
Provides a detailed country-specific analysis of the key trends and developments in the retail sector as a whole, as well as an assessment of the main drivers affecting the major retail segments including mass grocery retail, fashion, pharmacies, consumer electronics, home improvement and personal care. The market overview also considers the most effective store formats in a given country and the impact of these factors on the main international and domestic players’ development strategies.
This provides a brief overview of the key players in each subsection of the retail sector including MGR, Fashion, Home Improvement, Consumer Electronics, Pharmacies, and Department Store chains.
The Retail Reports draw on an extensive network of primary sources, such as multilateral organisations, government departments, industry associations, chambers and company reports.