The solution to global warming is undoubtedly the increase in investments, thus resulting in an increase in investment portfolios. But the money once raised must be settled from somewhere. Obviously, the increase in energy prices covers part of these new investment portfolios, based on new technologies, so consumers are the ones who settle the green transition.
Recently interviewed by Energynomics, leaders of energy companies have stated that no firm, certain price quotes can be offered in the market for certain products, not even for the short term. The reason? The increase in energy prices, which has led to rising prices for raw materials – largely.
Another effect was generated by production closure in the first year of the pandemic, a big mistake made by all producers, who fired part of the staff and decreased salaries only to hire back, at increased salaries, in many situations. But the limitation of production was materialized in a higher volume of demand, a raw material crisis (semiconductors, processors, certain metals and non-metals), price increase and, as a rolling effect, inflation across the board, throughout Europe.
Let’s not forget that Romania has an economy based on sales, on consumerism, and the decrease in purchasing power of the population by increasing the daily consumption basket by tens of percent, as well as the prices of other products, should lead to a decline in the sales volume. But the basis from which it was started after the first year of the pandemic was so low, that it generated a 7% increase for 2021, as EC analysts believe, or even 7.3%, according to the World Bank. The economy will register lower growth, of 4-5%, in 2022 and 2023, according to the cited institutions.
At the same time, inflation has resettled on new, supply-driven bases. Here the National Bank has little leeway, the monetary policy being able in general to deal efficiently with consumption-based inflation. The increase in energy prices is an external phenomenon that cannot be solved through the classical monetary policy instruments, such as increasing the interest rates – which would have a direct effect a slowdown of the economy as a whole, as it would increase the cost of loans. This is why the NBR has limited the interest rate increase to 0.25 percentage points, instead of 0.5%, as the market demanded, as NBR adviser Adrian Vasilescu himself claims. The risk of stagflation, an economy slowed down by inflationary spikes, would be one of the consequences of an increase in the key interest rate.
But let’s see what the NBR opinion is. In the minutes of NBR’s BoD of November 9 it is specified: “In the discussions on the recent evolution of consumer price dynamics, BoD members highlighted the new increase above the target range recorded in September by the annual inflation rate, which rose to 6.29 percent, significantly above the forecast level, from 5.25 percent in August and 3.94 percent in June. It was noted that the acceleration of its rise in the third quarter was mainly driven by exogenous components of the CPI, as in the first half of the year, and that the main contribution this time belonged to the steady rise in gas and electricity prices in July, to which were added influences from the continued rise in fuel prices, as well as the significant increase in vegetable prices in September, however, located at the level of certain products. At the same time, the annual adjusted CORE2 inflation rate accentuated its upward trend in the third quarter above expectations, rising to 3.6 percent in September from 2.9 percent in June. Almost half of the advance came however from quasi-generalized increases recorded in the processed food segment, mainly due to the impact of the significant increase in the price of raw materials on the international market and the increase in energy and transport costs, and another significant proportion was determined by the increase in the tariffs of MTPL policies in September”.
What can we expect in 2021? The financial power of the population can absorb higher prices – and sales rising by 35% on Black Friday seem to suggest this – at least in more developed cities and regions. On the other hand, the economy can suffer major mutations in poor regions, and the disparity between poor and rich areas will deepen.
Therefore, there will be evolutions of prices differentiated by region.
Inflation already has new bases, so it will calm down in the second half of 2022. “Board members have noticed that the anticipated inflation pattern witnesses in the current context a substantial additional upward revision, which is particularly pronounced in the short term. Therefore, the annual inflation rate is expected to extend its pronounced upward trend towards the middle of next year – climbing to 7.5 percent in December 2021 and 8.6 percent in June 2022, way above the previously forecasted values, of 5.6 percent and 4.2 percent respectively -, but to subsequently register a relatively rapid downward adjustment, falling in December 2022 to 5.9 percent and returning in the third quarter of 2023 within the target range, to 3.3 percent, marginally below the level forecast in August”, says NBR.
At the same time, “after the progressive decline in H1, the BIM unemployment rate recorded a slight increase in July and August and fell again in September to 5.0 percent – level similar to that of June -, therefore remaining visibly superior to values in the pre-pandemic period, which was characterized however by high tension in the labor market”, according to NBR. However, unemployment will be higher, given that many persons disappear from statistics since they no longer receive unemployment allowances. Instead, the untaxed area of the labor market could increase.
There will be however pressure on the budget and inflation of the external debt, which must be increased to ensure the cash flow necessary to finance the future and outstanding payments. Arrears in the economy are growing, both among private and state-owned companies, such as district heating companies. But if we manage to attract the billions made available, on paper, through the new European funding mechanisms, then the economy will resettle on new bases, the works newly engaged in the economy requiring funds, new orders, new employees. This is a new source of economic growth, in an economy focused largely on sales and consumption, but also a support for the new prices. In other words, if prices calm down in the short term, they will never return to the pre-pandemic levels, and in the medium and long term (5-10 years) they will increase, along with salaries (according to certain studies, salaries will increase by around 8% in 2021 and 2022). But in 2022 there will be an accentuated pressure on companies, the more expensive consumption basket generating acquisition preferences and a decrease in sales for certain categories of products and services. In other words, only the strong will survive, as it can already be seen in the equation of energy and gas supply.
