Bulgaria - Economic update June 2019
Stronger-than-expected economic growth
The latest GDP estimate confirmed that the Bulgarian economy gained momentum in the first quarter of the year. The National Statistical Institute (NSI) revised the preliminary GDP reading upwards by 0.1%, bringing the overall growth rate to 3.5% yoy and 1.2% on a quarterly basis. This somewhat stronger-than-anticipated expansion follows rather disappointing growth figures of H2 2018 and marks the fastest pace of year-on-year growth since the first quarter of 2018.
The breakdown by GDP components shows a number of striking developments. Growth accelerated largely on the back of strong export performance, which was held back throughout 2018 as a result of the Turkish currency crisis. As already suggested by robust balance of payments data for the beginning of a year, export growth more than tripled to 5.1% yoy, while imports increased by 3.9% yoy in the first quarter. Such a strong recovery of exports was underpinned by a pick-up in industrial production amounting to 3.1% qoq in Q1 2019. The economic expansion was also driven by solid private consumption growth, which continues to slow down. This again comes as no surprise given the poor retail sales statistics (-0.8% qoq in Q1 2019, a proxy for household consumption, that we attribute primarily to the effects of higher unemployment and inflation at the beginning of a year). While government spending rose by 5.2% yoy, a sharp slowdown was seen in investment which recorded 2.6% yoy growth down from 6.6% the previous quarter.
We continue to see the Bulgarian economy expanding at a pace of 3.2% in 2019 and 3.1% in 2020. Private consumption growth is expected to stabilise, supported by rapid wage increases and moderating inflationary pressures. However, a more significant improvement is unlikely given consumers’ deteriorating assessment of the general economic situation. Although export growth should keep a solid pace, the overall net exports’ contribution will remain negative due to an expected acceleration of import growth. Overall, the risks to our outlook are tilted to the downside and are primarily related to uncertainties in the external environment, e.g. a prolonged recession in Turkey or a sluggish performance of major European economies.
Tight labour markets
Unemployment in Bulgaria ticked down 0.1 of a percentage point on a month-on-month basis in April, standing at 4.5% according to Eurostat (figure BG). The employment rate, on the other hand, continue to grow and reached 68.3% in Q1 2019. This positive development was largely driven by a rise in employment among the group of 55-64 year-olds. Data for the first quarter of 2019 also showed an increase in both employment numbers and rates among primary and lower-education graduates. This can be explained by a strong performance of sectors that traditionally rely heavily on the low-skilled labour force, i.e. construction (up 3,000 workers yoy) and hotels and restaurants (up 15,000 workers yoy).
Figure BG – Bulgarian labour market tightening further
The tight labour market conditions have been fuelling rapid wage growth, which accelerated to 12.2% yoy in Q1 2019. This was further supported by the administrative increase in the minimum wage and the maximum insurance thresholds from the beginning of the year. The effect of the latter is clearly visible from the growth of the average remuneration in the information technologies sector from BGN 2584 to BGN 2930 in just a year. Moreover, a delayed public wage hike which took effect in April (instead of January) should further add to wage growth in Q2 2019.
Still, according to Eurostat data, Bulgaria has the lowest average hourly rate (EUR 3.5), followed by Romania (EUR 4.2) and Lithuania (EUR 5.5). As a result, many companies, especially from Western Europe and the United States, continue to outsource their business operations to Bulgaria. The majority of those companies use business process outsourcing, while the remaining use information technology outsourcing. The biggest Bulgarian cities (Sofia, Plovdiv and Varna) are the largest hubs for outsourcing services.
Inflationary pressures strengthening
Bulgarian headline inflation, as measured by the harmonised index of consumer prices (HICP), was running at 3.1% yoy in April, up from 2.8% yoy a month earlier. Inflation ticked up mainly on higher prices for food and non-alcoholic beverages together with transport. In the second half of this year we expect the annual inflation to moderate below 3%, depressed by the negative contribution of energy prices (under the assumption of downward dynamics in international oil prices) as well as fading base effects in the service prices. Overall, we expect inflation to average 2.5% in 2019.