Bulgaria - Economic update

Economic growth eases

The preliminary estimate of GDP for the third quarter previously signalled that growth in the Bulgarian economy was moderating, and the latest detailed data confirmed this. Although the Bulgarian National statistical institute (NSI) revised its estimate of domestic real GDP growth in Q3 2018 slightly higher from 3.0% yoy to 3.1% yoy, economic growth is still at its slowest rate since the last quarter of 2014 (figure BG). On the demand side, growth was supported by both final consumption and gross fixed investment, while the external sector contributed negatively as exports eased due to the less favourable external environment (i.e. a rapid slowdown of the Turkish economy). From the supply side perspective, services played the most prominent role, supported mainly by a pronounced expansion of real estate activities and telecommunications.

The NSI also revised GDP growth for 2017 to 3.8% compared to 3.6% previously. The foreign trade and final consumption data registered the most substantial revisions. Goods exports grew by 8.3% yoy, much faster than the initial estimate of 6% increase. Consumption data was also revised in a positive direction, having risen by 4.5% in real terms. Thus, the revised data has only reinforced the fact that the period of 2015-2017 was the most successful in terms of the GDP growth (on average of 3.7%) since 2008 when the global financial crisis started.

Even though annual GDP growth in 2018 will lag behind the recent period, high-frequency indicators suggest that economic momentum might be revived in the last quarter of this year. In November, the total business climate indicator increased by 0.6 percentage points compared to October after five consecutive months of a decline. Moreover, domestic demand is expected to continue a robust expansion, backed by positive developments in the labour market and the real disposable income growth. Investment activity should also stay strong, supported by the uptake of EU funds under the 2014-2020 EU programming period. On the other hand, net exports are expected to remain a drag on the growth over in Q4 2018 and to recover only slightly during 2019. Overall, we expect annual GDP growth to ease to 3.5% in 2018, and further moderate to 3.4% in 2019, with risks to the outlook being slightly on the downside. These mostly stem from rising global protectionism, economic and political uncertainties in the EU, and the slowdown in key non-EU export markets.

Labour market supported by seasonal activities

According to the NSI data, Bulgaria’s unemployment rate, measured by the Eurostat’s harmonised methodology, declined by 0.8 percentage points to 5.0% in Q3 2018. On a quarterly basis, the unemployment rate fell by 0.5 percentage point, which was expected given the higher employment rates in seasonal activities such as tourism and agriculture. As a result, the unemployment rate has reached its lowest level since Q4 2008. However, the unemployment rate is expected to rise slightly in the last quarter of this year after the end of the active summer season. According to the Bulgaria government’s Employment Agency, this is already the case as the registered unemployment rate rose to 5.9% in October from 5.6% in September, reversing the decline of the previous eight months.
Overall, the unemployment rate might fall slightly below the 5.0% threshold in 2019. A further decline in the unemployment rate is limited by insufficient workforce on the local market and an increase in non-EU workers for certain seasonal activities. As unemployment rate continues to decline, the dynamics of wage growth also remains solid. In the third quarter of 2018, the average monthly wages and salaries rose by 7.7% yoy. However, with rising inflation rate, the growth in HICP deflated real wage decelerated to 3.9% yoy, down from 5.7% in Q2 2018. While a significant slowdown in a wage growth was registered in hotels and restaurants sector (down from 8.3% in Q2 to 3.6% yoy in Q3 2018), the wage growth in manufacturing remained strong, reaching 8.7%. Public sector wages also continued to increase rapidly, up by 9.2% yoy, supported by wage increases in priority activities, such as education.

Government budget surplus in 201

For the first 10 months of 2018, the Bulgarian consolidated budget recorded a surplus of BGN 2.84 billion, equivalent to 2.6% of projected gross domestic product. Therefore, Bulgaria is likely to end the year with a budget surplus, surpassing the 2018 budget target, i.e. a deficit of 1% of GDP. This year, as for 2016 and 2017, the budget is set to end in a surplus mainly due to improved tax collection on the one hand and expenditures that have been budgeted but not made (mainly related to EU funds) on the other hand.

In November, Bulgaria’s parliament also approved the final reading on the government’s 2019 draft budget that targets a fiscal deficit of 0.5% of GDP. The budget envisages higher spending on public sector salaries and education, i.e. a 10% increase in salary for all public servants and 20% increase in teachers’ salaries. Last but not least, the government also proposed a 10% hike in the minimum monthly salary.

Figure BG – Real GDP growth (% change year-on-year, sa)

Source: KBC Economics based on NSI (2018)
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