Bulgaria - Economic update April 2019
Slowing down, but still promising
After two years of robust economic growth, the pace of economic expansion lost traction in Bulgaria last year. Nonetheless, the underlying quarterly dynamics of real GDP growth suggest that the economy gained some slight momentum in Q4 2018 with growth accelerating to 3.0% yoy from 2.7% yoy in Q3. Turning to 2019, this momentum seems to be maintained, although the short-term indicators give somewhat mixed signals.
To start with, industrial production rebounded strongly in the first two months of this year (figure BG). After rather disappointing figures in Q4 2018, likely reflecting the weakness in the German manufacturing industry, industrial output jumped 6.6% yoy in February, following the 2.6% yoy rise in January, and thus marking the strongest expansion since May 2017. February’s acceleration was driven by a strong pick-up in manufacturing output, particularly of fabricated metal products, but also by a substantial expansion in the mining and quarrying industry. A similarly positive development can be observed in construction. Construction output grew by 9.2% yoy in February, largely owing to an improvement in the dynamics of civil engineering from negative growth of 4.1% yoy in January to a positive increase of 3.5% yoy in January. Moreover, further support came from building construction which accelerated to double digit growth.
A less optimistic picture is, however, emerging from the latest
retail sales figures. On a monthly basis, retail sales decreased by
0.6% in February, following the declining trend that started in
December 2018. The weakening momentum is also evident from the
year-on-year dynamics as retail sales marked its first, albeit
marginal, decline of 0.1% since 2013 (figure BG). Such a development
is mainly due to the decrease in sales of food, beverages and tobacco,
but a sharp drop in online sales also weighed on the overall result.
Figure BG - Short-term activity indicators giving mixed signals (% change year-on-year)
Still, prospects for the months ahead might not be all that gloomy given the improvement in business sentiment among retailers in March. This was mainly triggered by improvements in sales volume expectations over the next three months, which support our view that retail sales will return to moderate growth. After all, this is in line with our expectations of a general slowdown in consumption this year on the back of deteriorating consumer confidence and higher inflation weighing on real wage growth. Overall, however, favourable labour market conditions suggest that the slowdown in consumption growth will not be drastic and household consumption should remain the key driver of the ongoing economic expansion.
Unemployment rate expected to tick down
The favourable developments in Bulgaria’s labour market were a defining feature of 2018 and this year is not likely to be different in that regard. The latest unemployment figure signals that the labour market is tightening further; according to the Bulgarian Employment Agency, registered unemployment fell by 0.2 percentage points to 6.2% in February, following a seasonal increase in January. Similarly, according to Eurostat’s harmonized unemployment figures, the Bulgarian unemployment rate remains low by historical standards at 4.7%, down from 5.4% a year earlier.
While such a development gradually translates into higher household disposable incomes and consequently boosts economic activity, from the supply side perspective, Bulgarian companies find it increasingly difficult to cope with the historically unprecedented labour shortage, especially in industry and construction. Moreover, given our expectations of a further decline in the unemployment rate through 2019-2021, the situation is not likely to improve materially; in fact, the opposite is expected due to the negative demographic trends that will be reflected in a further decreasing labour force. As a consequence, job creation is expected to lose its importance as a key growth-supporting factor.
While inflationary pressures eased significantly by the end of 2018, HICP inflation posted a 0.3% mom increase in February. The annual inflation also edged up to 2.4% in February, mainly driven by higher food prices. All in all, we confirm our forecast of an annual inflation rate of 2.5% for 2019.
Government bond yields to trend down further
Bulgaria’s 10-year government bond yields have been declining constantly since the global financial crisis in 2008, backed by favourable developments on both domestic and external fronts. This year we expect the Bulgarian spread to the German 10-year government bond rate to remain limited to 65 basis points at the end of 2019. Apart from the impact of unaltered monetary policy by the ECB in 2019, we expect that the steady trend of Bulgaria’s sovereign debt reduction will continue, supported by the Ministry of Finance’s plan for a negative net financing of government debt.