The European economy registered a tangible slowdown in the first half of the year, re-confirming fears that the period of rising growth rates is over. Unlike the first quarter, this time the Bulgarian economy grew with the general flow and registered the laziest pace in three years, with GDP increasing by 3.4% year-on-year. Two warning lights flashed in the data. On the one hand, labor market statistics show that the economically active population - the people working and those looking for jobs - is decreasing. On the other hand, inflation is accelerating at a surprising speed, threatening household purchasing power and consumption along the way. Meanwhile, investment is on the rise but still seems unsustainable, and the economy as a whole seems to be in a state of inaction. Income vs. inflation For the time being consumption is increasing, growing at an annual pace of 4.7% in the second quarter, with household purchases boosting the trend due to rising incomes and consumer lending. Wages in Bulgaria grew by 8.2% year-on-year in the second quarter, while consumer loans jumped 15.2%. Meanwhile though, prices are also on the rise, deleting part of the effect of higher remuneration. In July, annual inflation reached a five-year record of 3.5% , driven, on the one hand, by courier and hotel services, and on the other - by increasingly expensive fuels, which are also pushing up prices of heating and electricity. Moreover, it seems that there are little prospects for the rise in prices to slow down at present. According to the conclusion of financial intermediaries quoted in the Ministry of Finance's last quarterly macroeconomic report, core inflation has been steadily accelerating since the start of the year, which gives no reason to expect a slowdown in prices anytime soon. "The question now is how this new reality will affect the economy and consumption. A fresh rise in the prices of utilities is expected in the upcoming heating season, rents are also rising. This is seizing household disposable income and is likely to lead to a drop in consumption at some point," said Desislava Nikolova of Sofia-based think-tank Institute for Market Economics (IME). Labor market heats up Rising household purchases are being propelled by higher wages and decreasing unemployment. However, the data shows that the labor market reached a peak in the second quarter - unemployment fell to a ten-year low of 5.5%, whereas the number of people who neither work nor want to, increased by over 8,000. Meanwhile, the number of employed fell by 14,600 on an annual basis, which means that the economy was not creating new vacancies. According to Nikolova, the continued fall in unemployment is due to the fact that some people have become economically inactive - they either have found seasonal employment abroad or have foregone looking for a job. "It can clearly be seen that the economic activity of the population has peaked and there are no more reserves for the inclusion of new people in the labor market," Nikolova opined. Earlier this year, UniCredit Bulbank analysts also estimated that the improvement in the labor market will not last at the same pace throughout 2018. Currently, the unemployment in the country is in large part structural, as a result of skills mismatch and weak labor force mobility. In theory, when economies reach cyclically low unemployment levels, a slowdown follows, a loss of jobs, which increases unemployment and restores balance to the market. Experts at Colliers International recently wrote in a report that symptoms of cyclical exacerbation can so far be found only in Romania, but the prerequisites can be seen all over Central and Eastern Europe. Their research shows that labor shortages are forcing 40% of firms in Bulgarian industry to put their expansion plans on hold, whereas the average percentage in the EU is a little over 20%. One upside Another growth factor in the second quarter was investment, expanding at an annualized rate of 4.4%. A damper on the positive news is that the pace actually slowed from 7% in the previous quarter. The slowdown is probably due to weaker activity in the private sector because government capital expenditure has been rising steadily this year in light of the approaching end of the current EU funding period. On the private sector side, business statistics show sluggish construction activity, which could be due to bad weather conditions in June. Business lending is inching up, though, and mortgage loans maintain high rates of growth. ...and one downside The rise in consumption can also be seen in imports, which grew by 4.6% year-on-year in the second quarter. Bulgarian trade balance remains negative, and the growth of exports continues to decelerate. As at the end of June sales of Bulgarian goods abroad were 1.6% higher than a year earlier, largely due to exports to other EU member states.
According to the most recent macroeconomic forecasts, net exports will likely remain a negative contributor to economic growth in the next two years. The crash of the Turkish lira may speed up the process given that Turkey is Bulgaria's fourth largest export market.
In line with European prospects, analysts are betting on a slowdown in Bulgaria in the coming two years and forecasts for 2018 are already being revised downward, diminishing the opportunities for fresh investment and capacity expansion.