Bulgaria - Economic update May 2019

A batch of mixed signals

Available data continue to show a mixed picture for the Bulgarian economy in the first quarter of 2019. On the one hand, industrial production expanded strongly in the first three months of the year; after the sharpest expansion in nearly two years in February (6.6% yoy), industrial output increased by 2.8% yoy in March on the back of a strong pick-up in the manufacturing and mining industries. In addition, developments on the external front were also favourable with merchandise exports surging by almost 11% yoy. This suggests that the contribution to GDP growth from net exports is likely to improve this year after having been a significant drag on growth in 2018 due to fallout from the Turkish currency crisis. These positive developments are reflected in the economic growth acceleration in Q1, reaching 3.4% (annualised) from 3.2% in Q4 2018.

On the other hand, the figures from the demand side of the economy are far less optimistic. Consumer confidence deteriorated in April, albeit from a relatively elevated level. Compared with three months ago, the expectations of both the urban and rural population over the next 12 months turned particularly more negative. As such, Bulgaria goes against the international trend in which consumer demand is holding up economic performance. Lower consumer confidence has had a clear impact on retail sales, which have lost momentum since the beginning of the year. While in February retail sales marked the first drop in five years, growth remained sluggish at 0.6% yoy in March, indicating less rosy prospects for household consumption growth this year.

Labour shortage becoming more pronounced

Labour market developments continue to be favourable with the unemployment rate falling to a 10-year low of 4.6% in March according to Eurostat’s harmonized unemployment figures. While the tight labour market has been fuelling wage growth and consumer spending, it also led to a significant shortage of labour supply, especially among high-skilled workers. Moreover, given the adverse demographic outlook, the medium to long-term outlook is hardly optimistic, as the loss of skilled workers will likely depress productivity growth, reduce potential output and put significant pressure on public finances. To address the challenge of an acute labour shortage, the government has recently introduced new policies, including initiatives to bring back overseas Bulgarians and agreements with neighbouring countries regarding imported workers.

Inflationary pressures intensified in March with annual HICP inflation rising to 2.8% yoy on the back of higher food prices (5.0%) and prices of housing and utilities (4.6%). For the year as a whole, we expect inflation to average 2.5%.

Housing market is cooling down

After a robust, two-year long period of house price growth, supported by a combination of rising real wages, higher consumer confidence and low interest rates, the Bulgarian housing market cooled down in the last quarter of 2018 (figure BG). According to Eurostat, house prices increased by 5.5% in Q4 2018, which marks the slowest growth since the first quarter of 2016. Still, we interpret the recent figures as a healthy downward correction rather than a trend that would lead to a more drastic slowdown, or even possibly a decline in house prices in Bulgaria. The reason is that the number of real estate transactions continues to grow, albeit at a slower pace, which together with the rising number of building permits and favourable developments in terms of mortgage credit, suggests no fundamental weakness in the market. The recent slowdown can thus be attributed mainly to fading interest from foreign investors in the Bulgarian property market. While in 2017 net foreign direct investment in the Bulgarian real estate sector amounted to EUR 345.7 million, last year recorded net outflow of EUR 148.9 million.

Figure BG – Bulgarian housing market is cooling down (house price index, existing and new dwellings, % change year-on-year)

Source: KBC Economics based on Eurostat

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