Bulgaria fared better than expected in 2020. Yet it might have a worse than expected 2021.
Unlike in the spring, the shock to the economy from the coronavirus spread was milder in the last months of 2020. Most businesses have adapted and are continuing their day-to-day operations in pandemic conditions. According to the National Statistical Institute's first estimates, the Bulgarian economy shrank by 3.8% year-on-year in the fourth quarter and expanded by 2.1% on a quarterly basis.
The less-than-ideal handling of the second wave of the disease in the fall by the authorities and the botched vaccination campaign, though, led to revisions in the forecasts. The initial outlook for a speedy recovery in 2021 has been abandoned, and now experts are betting on the second half of the year and 2022.
Where did all the consumption evaporate?
Investment in the last quarter of 2020 decreased by 7.9% compared to the fourth quarter of 2019. Yet the last three months of the year saw higher net exports of goods and services compared to the third quarter - by 11.3%.
Surprisingly, consumption took a hit of 5.7% on an annualized basis. This rate of decrease is so big that it borders on suspicious. To start with, although the COVID-19 wave in Bulgaria was worse in the fall compared to the spring, restrictions were not as harsh. Restaurants and hotels couldn't accept customers at their physical locations but were making deliveries. Malls were ordered to shut down in December, which may have been the reason for the 12% decrease in turnover in retail, but other stores were allowed to stay open. For comparison, in March the indicator fell by over 20%. Also, in the fall, people could practically go wherever they wanted.
So it makes sense for consumption to take a hit, but maybe a little bit smaller than the one in the second quarter? Yet in the second quarter, consumption fell by only 0.3% on an annualized basis and 1% on a quarterly basis.
The inexplicable consumption data from the last quarter of 2020 can mean one of two things - either the closure of malls and hospitality establishments was a lot more harmful to the economy than initially thought, or the data for 2020 will go through big revisions in the months to come.
Labor market is doing well
There is some good news in end-2020 macroeconomic statistics, one of which is that the labor market was improving and unemployment was not too high. The number of unemployed in the fourth quarter of 2020 decreased by 96,000 people on an annualized basis, but the unemployment rate hovered a little over 5% compared to 4.1% in the last months of 2019.
The economic sectors reporting fewer workers are understandably restaurants and hotels (-38,000), manufacturing, and education (-17,000 each). It should be noted that the Employment Agency's indicator for the unemployment rate might be more accurate right now than usually because it looks at the current number of people registered as unemployed (not accurate in Bulgaria because of the volume of the gray economy) but the number is still quite low - 6.7% as of December.
Other good news concerns purchasing power.
On the rise
Wages have continued to increase in Bulgaria even amid an economic crisis. By the end of December 2020, the average gross monthly wage hit 1468 levs or 750 euro. That might not seem much to a Western audience, but it's the equivalent of a 9.4% growth rate in the fourth quarter on an annualized basis. The increase came from both public sector wages (up 13.8%) and private sector ones (9.1%).
There are several factors for the rising wages in Bulgaria, despite the pandemic. On the one hand, skills mismatches keep driving up the cost of qualified personnel in the private sector. On the other, authorities have been increasing the minimum wage (332 euro as of January 2021), and remuneration for various public sector employees like police officers, teachers, and army personnel, and of course - medical personnel.
And while wages have been rising rapidly, inflation remains relatively low, which has led to an increase in purchasing power over the past few years. In January 2021, national statistics even reported a decrease in average consumer prices on an annualized basis in Bulgaria for the first time since 2016 - by 0.6%, according to the Bulgarian methodology, which takes into account the larger share of food in consumer spending.
The return of deflation is hardly surprising as consumer prices have been going down since the start of 2020.
The decline reported in January is largely due to temporary effects. At that time in 2020, the consumer price index increased significantly due to rising vegetable and meat prices, which pushed up the base when comparing this year to the previous. In April 2020, energy prices dropped due to the crash of international oil prices. However, oil prices have since recovered, which means that annualized comparisons will show a significant increase in the consumer price index starting in spring. Moreover, household spending is expected to increase as the economy recovers and will also support higher prices for services.
Until then, deflation will likely remain. Most macroeconomic forecasts are betting that 2021 will end with inflation slightly higher than in 2020. The Bulgarian National Bank, for example, said in its December economic forecast that core inflation will average at 0.9% in 2021 compared to 0.5% in 2020.
Exports' surprising comeback
In trade, the last month of 2020 showed the most optimistic results since the start of the crisis - Bulgaria's exports to the EU rose 10.3% on an annualized basis, whereas exports to third countries saw a decrease of 1%. Imports fared worse - they went down by 6.2% in total in December 2020 compared to December 2019.
In 2020, Bulgarian exports were worth 54.5 billion levs (27.9 billion euro), two-thirds of which went to other EU member states. The sum is 6.9% below the value of sales in 2019. Meanwhile, imports fell by 9.6% in 2020, to 59.7 billion levs (30.5 billion euro).
Exports to countries outside the EU were down 11% compared to 2019, with the decrease mostly due to a fall in fuel sales. For example, in Turkey - Bulgaria's largest destination for fuel exports, fuel sales declined by 72% to 323 million levs in 2020. Another top destination - Egypt, saw exports drop by 58% to 317 million levs because of fewer sales of propane-butane and gasoline.
Detailed data for December is unavailable yet but by November the largest contribution to the decrease in exports to the EU was the drop in sales to Italy - the largest market for the Bulgarian export-oriented textile industry. The data also shows a significant decrease in exports to Greece (by 8.2% on an annualized basis) and Spain (by 20.5%) - in nominal terms, the decrease equals about 600 million levs in total.
However, there is good news - exports to Belgium and Germany, one of Bulgaria's largest trading partners, have grown even amid the crisis. In Belgium, the increase is by 7.9%, largely due to copper anode sales, whereas in Germany it's 0.4%, driven by rising sales of automobile components and e-bikes, as well as gold ore.