Bulgaria - Economic update February 2019
Strong domestic consumption
In line with the general European trend, Bulgarian economic activity slowed in the second half of 2018. Industrial production dropped by 2.3% mom in December in seasonally adjusted terms, the sharpest monthly decline since May 2016. The most severe downturn was registered in the automotive industry (-25.4% yoy) and metal products (-25.0% yoy). In addition, domestic construction also struggled in December, declining by 2.4% compared to the previous month (seasonally adjusted). As such, a more pessimistic picture of the supply side of the Bulgarian economy appeared.
However, looking on the demand side, the growth story of the Bulgarian economy gets a different perspective. Despite a slight increase in the unemployment rate in Q4 2018, the labour market remains tight. As a result, robust wage growth together with moderating inflation pressures are expected to boost private consumption growth. After all, despite a mild slowdown, the December retail sales growth of 3.8% yoy supports the narrative of buoyant household consumption through the end of 2018.
In 2019 we expect a slight slowdown in GDP growth to 3.4% from 3.5% last year. The Bulgarian economy is againset to benefit from robust domestic demand. Private consumption will remain in the driver’s seat with an expected rise of 7.7% yoy, and will be underpinned by an increase in the minimum wage and a rise in public sector wages. In addition, the projected increase in public infrastructure spending and a recovery in the use of EU structural funds will support fixed investment.
On the other hand, the external environment is becoming more challenging. The fallout from the Turkish crisis proved to be a significant drag on growth in 2018 and is expected to ease only moderately this year. The slowdown in the euro area will not be supportive either. Nor will the deceleration of exceptional economic growth in Romania – Bulgaria’s fourth most important trade partner. As a result, given weaker demand dynamics in major export markets, the risks to Bulgarian growth are tilted to the downside.
Labour market still under pressure
Labour market dynamics remain tight which, together with additional public sector wage increases, is set to provide support for private consumption in 2019. According to Eurostat, the unemployment rate was at 5.2% in December, unchanged compared to the previous month, but 0.5 percentage points lower compared to December 2017. As the economy is now operating close to full employment, we expect to see job creation losing some momentum (figure BG1).
Figure BG1 - Bulgarian economy close to full employment (unemployment as a % of active population, seasonally adjusted)
On the contrary, inflation pressures eased significantly by the end
of 2018 (figure BG2). Although average annual inflation, measured by
HICP, increased to 2.6% in 2018, the downward trend since the August
peak translated into the rapid fall of consumer price inflation to
2.3% in December from 3.0% in November. The significant decline in
inflation pressures was predominantly on the back of lower liquid fuel
prices. Given the positive base effect (i.e. a hike in regulated
energy and tobacco prices last year), as well as lower international
metals and fuel prices, we have reduced our expectation of inflation
for 2019 from 3.0% to 2.5%.
Figure BG2 - Inflationary pressures eased significantly by the end of 2018 (Harmonised Index of Consumer Prices, % change year-on-year)
Conservative fiscal policy reflected in another budget surplus
Government policy continues to focus on fiscal prudence. The
consolidated budget posted a small surplus for the full year 2018 at
BGN 137 million, or 0.1% of GDP. This marks the third consecutive year
of budget surpluses, albeit the least impressive relative to 1.6% in
2016 and 0.8% in 2017. The lower budget surplus mainly reflects
increased spending, i.e. higher pension and health insurance payments,
higher salaries in the education sector, and increased capital
expenditures on infrastructure. Still, Bulgaria managed to reduce the
government debt-to-GDP ratio to 22.1% in December 2018, ranking among
the lowest in the European Union.
The stable fiscal position is expected to be maintained this year. We see the government budget balance in a surplus of 0.3% of GDP (compared to 0.5% projected by the government) on the back of the acceleration in EU spending and expenditure in critical areas (education, health and infrastructure). Overall, robust fiscal buffers offer enough space for automatic stabilizers to act without limitations in response to an unexpected shock, e.g. from external demand.