Last spring, expectations for 2020 were set for an economic apocalypse. The enormous uncertainty surrounding the pandemic, the shutdown of entire industries, and the lockdowns fueled forecasts of deep double-digit GDP declines across the globe. Large-scale stimuli from central banks and governments followed, and despite the severity of the second wave of the coronavirus at the end of last year, expectations regarding the depth of the recession have improved.
In Bulgaria, the central bank also improved its expectations for the GDP contraction in 2020 - from 8.5% estimated in June to 5.5% in September, and 4.4% in January 2021.
However, more interesting than the macroeconomic forecast in the central bank's latest publication is the special section on the data on household spending compiled by the National Statistical Institute (NSI). According to the institute, household expenditures increased by 2% in the period of January-September 2020. Taking into account the rise in unemployment during this period, and the weak summer tourism season, the data is surprising. Moreover, it contrasts sharply with the decline observed across the EU where consumption declined by 7.4% on average.
A possible argument in support of the unique consumption growth in Bulgaria is that restrictions were much less severe compared to other countries in Europe. However, even member states with much milder measures reported a decline in consumption, counters the Bulgarian National Bank (BNB). Another possible explanation - the fiscal stimuli of governments, also failed the central bank's test. In Bulgaria, they were the equivalent of 4% of GDP, which is below the EU average.
The central bank also compares other indicators that are logically and historically related to the rate of consumption, such as the indices of retail trade turnover and the volume of card payments.
"In the second and third quarters of 2020, these high-frequency indicators indicate a significantly more subdued dynamics of private consumption compared to that registered according to NSI national accounts", said the BNB.
What exactly are we measuring
A possible explanation for the increase in consumption lies in the methodological specificities behind the indicator. Generally speaking, there are two concepts - domestic and national. The domestic path covers all consumer expenditures incurred in the country - from both local households and foreign tourists. The national approach estimates the consumption of the local population - the costs of Bulgarians in other countries are included, but those of foreigners made in Bulgaria are excluded.
To calculate GDP, the national concept is used. As it doesn't take into account the 60% decline in the number of visiting foreign tourists in 2020, it makes consumption seem much more resilient. Also, in 2020 Bulgarians focused their consumption locally, whereas in previous years people traveled and made expenses abroad more.
Historically, the two approaches give very similar results. However, whereas the national approach shows a 2% growth rate in 2020, the domestic one would report a 4.1% decline. But this can't be the full explanation as other tourism-reliant countries like Croatia, Greece, and Portugal also use the national approach but reported a decline in private consumption.
Why is it important
It should be noted that the choice of concept does not affect GDP in any way. Expenditures that are excluded from consumption would be included in net exports of services. Former Deputy Minister of Finance Lyubomir Datsov explains that such revisions within the components of GDP are not unusual and can also occur with the receipt of unreported data on investments or the balance of payments. Another economic analyst with whom Kapital Weekly spoke also believes that the current estimates of GDP components are quite uncertain and that the NSI is probably making little adjustments so that the data look logical. The alternative, if the institute were to rely only on 'stable' data, would be to make huge revisions, which is also not received well by the public.
Having said that, consumption is an important indicator for forecasting and budgeting in a number of economic sectors, so more clarity on how the final figure came to be would certainly be welcome. Of course, that figure is still an estimate of the NSI, not actual collected data on all expenditures made by households. But often methodologies for such indicators quickly become obsolete in the rapidly changing services market worldwide.
A little truth
Despite all the legitimate doubts that Bulgarians are the only Europeans to spend more amidst a crisis, there are a few other indirect indicators suggesting that consumption in 2020 may not have suffered so much in Bulgaria. One is that the compensation per employee continued to grow - at an annualized average rate of 5.4% in January-September 2020, second only to Lithuania in the EU. The central bank considers this factor, concluding that the increase in wages "was not sufficient to offset the pandemic's negative effects on consumers' financial position, with household real disposable incomes falling by 1.8 percent from January to September 2019."
Another factor may be the fixed monthly supplements to pensions, which the government introduced as a kind of anti-crisis measure in September. Given the low-level incomes of the elderly in the country (the minimum pension was 153 euro as of January 2021), incomes almost entirely turn into consumption. According to Lyubomir Datsov, this was a particularly good anti-crisis measure. Datsov also sees other factors that could be a hidden source of consumption.
"There may be a formalization of incomes. Also, the statistics may have caught the tens of thousands of Bulgarians who returned from abroad and started spending here," said Datsov, with the caveat that these assumptions are hypothetical and it is difficult to calculate how significant their effect on the final estimates could be.
An indirect indicator is the increase in VAT revenues reported by the Ministry of Finance from transactions in the country - by 700 million levs (358 million euro), the equivalent of a 10.3% growth rate in 2020 compared to 2019.
Thus, although there is no specific and clear reason, the explanation may not necessarily be that the NSI is "rigging the data" but that domestic consumption was more sustainable than one would intuitively expect.