Bulgaria - Economic update March 2019
Economic expansion moderated in 2018
The latest national accounts data confirmed that the Bulgarian
economy ended 2018 on a rather soft note. According to the National
Statistical Institute (NSI), the economy expanded by 3.2% yoy in the
fourth quarter, marginally above the third quarter’s reading of 3.1%
yoy (figure BG1). On a quarter-on-quarter basis, the economy grew by
0.8% in Q4 2018 compared to 0.7% in the previous quarter. Overall,
fourth-quarter figures showed surprising weakness in household
consumption amid deteriorating consumer sentiment and moderating wage
growth. As a result, domestic consumption recorded a decline of 0.1%
qoq for the first time in four years. Moreover, investment somewhat
lagged expectations with year-on-year growth slowing from 7.0% in Q3
to 6.6% in Q4. This was despite earlier indications of faster
absorption of EU funds, as well as fiscal easing by the end of the
year. Ultimately, the external sector was the key driver of growth.
After contracting for two consecutive quarters, exports of goods and
services saw a rebound of 1.4% yoy in Q4, suggesting resilience amid a
more challenging global backdrop. These volatile evolutions indicate
that the Bulgarian economy is very sensitive to developments in the
surrounding and euro area economies, but also relatively resilient.
Figure BG1 – Q4 2018 real GDP growth marginally above the third quarter’s reading (real GDP, seasonally adjusted, % change year-on-year)
For the year as a whole, real GDP growth lost momentum markedly, dropping to 3.1% from 3.8% in 2017. The main driver of growth remained domestic demand. While private consumption accelerated on the back of raising real wages and favourable labour market developments, the increase in public consumption reflected mainly higher spending on wages. In addition, the recovery in the disbursement of the EU funds provided a boost to investment growth. Therefore, the slowdown in economic growth reflected mainly the negative contribution of net exports, i.e. the weakening of exports due to softer external demand from key trading partners on the one hand, and solid imports dynamics underpinned by strong domestic demand on the other.
We expect that the Bulgarian economy will keep a strong pace of expansion in 2019 and 2020 with real GDP growth of 3.2% and 3.1% respectively. The downward revisions to our forecast (-0.2 percentage points. in both 2019 and 2020) reflect slightly weaker, though still solid, private consumption growth. This is due to worsening consumer confidence in Q4 2018 that is carrying over into 2019. In addition, a more challenging external environment, i.e. the slowdown in major EU export markets together with a sharp downturn in the Turkish economy, will also weigh on exports that are expected to recover only moderately throughout the year. In total, we expect Bulgaria to follow the growth slowdown throughout the region, but at a slower pace
Labour shortage at historical peak
Favourable labour market developments continue to prevail in 2019. According to the revised Eurostat data, the unemployment rate remained at 4.8% in January, down from 5.6% a year earlier. Moreover, as the overall number of unemployed persons edged only marginally higher to 159,000, it is still close to a record low. As a result, the level of labour shortage is at a historical peak with the greatest shortages in industry and construction, but lately also in services. Meanwhile, contrary to other Central and Eastern European economies, the number of workers arriving from outside the European Union is still limited and mostly concentrated in a few economic activities. This, coupled with adverse demographics, poses a serious challenge to future growth.
Despite the strong labour market and still solid wage growth (7.4% yoy Q4 2018 for the public sector and 6.8% yoy Q4 2018 for the private sector), inflation pressures continue to weaken. Annual inflation, as measured by HICP, dropped to 2.2% in January, mainly on the back of decline in transport prices. As fuel prices rose again in February, the downward trend in transport prices is likely to turn around. Nonetheless, we believe it is unlikely to lead to a sustained acceleration in the inflation rate this year given the expectations of stable oil prices, as well as the strong base effect. All in all, we expect annual inflation to reach 2.5% in 2019.