Bulgaria - Economic update
Economic growth losing pace
Preliminary estimates for Bulgaria’s real GDP growth in Q3 2018 suggest that economic growth continues to ease. The economy expanded by 0.5% qoq in the third quarter, down from 0.8% qoq in the Q2, while on a yearly basis growth slowed down to 3.0% from 3.4% in the second quarter of 2018. Although detailed figures on the composition of growth are not yet available, both final consumption (6.9% yoy), supported by a sustained wage growth, and gross fixed capital formation (6.2% yoy), supported by EU funding, remain strong drivers. However, the external sector put a drag on the growth as exports decreased by 3.2% yoy. This was likely due to weaker economic activity in Turkey, which is one of Bulgaria´s main trading partners.
Preliminary GDP figures confirm the picture suggested by a weakening in Bulgarian activity and consumer confidence. In September, the seasonally adjusted industrial production index dropped by 1.2% in comparison to the August figure. Moreover, the total business climate indicator – though staying above its long-term average – decreased by 1.9% in October against the previous month in line with the more unfavourable conjuncture in the industry, retail trade and service sector. Last but not least, the total consumer confidence indicator fell by 3.2% in October compared to July.
Labour market remains strong
The labour market in Bulgaria remains strong and its gradual tightening continues to support our expectation of robust wage growth figures, supporting household consumption. In September 2018, registered unemployment remained at the previous month’s rate of 5.3%, which is the lowest since 2008 (figure BG1). While the last month registered a decline in seasonal activities in tourism, trade, manufacturing, agriculture and construction, the impact was offset by the observed growth in education related to the beginning of the new school year. Nonetheless, the continuous high level of labour demand is expected to be increasingly accompanied by labour supply limitations, i.e. unfavourable demographics trend as the working-age population is set to decline by about 1% a year in 2018-2020.
Figure BG1 – Bulgarian unemployment rate close to historical lows (unemployment in % of active population)
Inflation continues to accelerate
Consumer prices growth accelerated in September with a 0.7% mom and 3.7% yoy increase, the latter being the highest since January 2013. The main reason behind the additional rise is growth in food and non-alcoholic beverages (3.3% yoy) and housing (4.6% yoy) prices. Moreover, transport prices continue to grow fast at 9.2% yoy, supported by the surge in oil prices in the first three quarters of the year. We expect inflation to further accelerate in the second half of 2018, as it will be driven by a further increase in services prices as well as a surge in administratively determined prices. The latter will reflect the effect of the increase in excise duty on tobacco products since the beginning of the year and, and to a lesser extent, the appreciation of water services since January 2018. In addition, as of October 2018, new price increases were introduced on electricity, gas and heating services, ranging from 4-9% in different regions of country.
Government debt set to decline further
The Bulgarian Ministry of Finance has set itself the task of maintaining a stable nominal amount of government debt over the next three years. Despite the expected GDP growth moderation towards roughly 3.6% in the coming three years, the Ministry’s target is to reduce the debt-to-GDP ratio from the current 22.5% down to 17.7% in 2021. The lack of fresh issuance, however, already hampers the development of secondary trading in Bulgarian government securities. This year is set to be the first in the last 26 years, which will not see new government bond issuance. Therefore, the yield of 10y Bulgarian government bond already dropped below 0.90%.