Bulgaria - Economic update January 2019
Growth picture to gradually deteriorate
The latest official statistics show that the Bulgarian economy lost further pace in Q3 2018. Real GDP growth slowed to 3.1% yoy from 3.4% in Q2 2018 as a result of the continued decline in net exports and a moderation in fixed investment growth. The slowing economic momentum appears to have carried over into the last quarter of 2018 as domestic sentiment continues to weaken. While the total business climate indicator published by the National Statistical Institute decreased by 0.5 percentage points mom in December on the back of a less favourable business climate in industry (extending the decline to six out of the seven latest prints), consumer confidence fell to its lowest level in nearly two years.
In addition, the latest figure for industrial production also suggests a slowdown in economic activity. Industrial output growth decelerated in November to 1.2% yoy in working-adjusted terms, in line with generally weaker industrial data from the euro area. As for the first eleven months of 2018, industrial production rose by 1.3%, significantly lagging the annual expansion of 3.4% in 2017. On a more positive note, retail sales accelerated to 6.5% yoy in November, which indicates that private consumption is still enjoying a strong ride.
As the overall growth picture gradually deteriorates, we expect GDP growth to moderate to 3.5% in 2018 and further to 3.4% in 2019. Private consumption is set to remain the main driver of continuous economic expansion this year. However, with elevated inflation and slower employment growth, we expect to see the start of a slowdown in household consumption growth. On the other hand, investment activity should pick up, benefitting from still low interest rates and above-average absorption rates for EU funds. Given the weaker activity in Bulgaria's major trading partners, i.e. Turkey and the euro area, the contribution from net exports is expected to remain negative. Risks to growth are tilted to the downside, dominated by external factors, i.e. rising protectionism and trade stand-offs, economic and political uncertainties in the EU, and a further slowdown in Bulgaria’s key export markets.
Figure BG1 - Real GDP Bulgaria (yearly change in %)
Unemployment close to its natural rate
In the months to come, the Bulgarian economy will be affected by waning labour market improvements. The labour market has been improving steadily since 2013, with the unemployment rate dropping to a 10-year low and fuelling wage growth and consumption. However, the trend may now start to reverse as the output gap closes and unemployment is near its natural rate. While according to Eurostat the unemployment rate was unchanged in November at 5.4%, the Bulgarian government’s Employment Agency confirms a trend shift as the registered unemployment rate rose to 6.0% in December.
Although inflation pressures eased somewhat in November, headline inflation is set to remain elevated in 2019. Consumer prices, as measured by the HICP, declined by 0.3% mom in November driven pre-dominantly by lower fuel prices. On a year-on-year basis, inflation slowed down to 3.0% in November from 3.6% a month earlier and is expected to remain close to that level by the end of 2018. As a result, annual headline inflation is projected to rise to 2.7% in 2018 and further to 3% in 2019, mainly due to the strong base effect in energy products.
Prudent fiscal policy set to reduce government debt
Thanks to continuous prudent fiscal policy, the government’s need for debt financing is declining. In other words, government debt is expected to shrink to 20.5% of GDP in 2018 and further to 16.5% by the end of 2021, thus remaining well below the Maastricht rule. In terms of the structure of government debt, the last year saw a trend of an increase in the share of external debt, rising to 75.4% from 71.5% a year earlier. Moreover, the maturity structure of government debt was also slightly altered as the share of bonds with maturities between 1 and 5 years rose (from 25% in 2017 to 33% in 2018) at the expense of long-term maturities, i.e. more than 10 years (from 24% in 2017 to 17% in 2018). Though such a move might in general increase refinancing risk under unfavourable economic conditions, given the overall low level of Bulgaria’s government debt, we see no reason for pressing concerns.