- The statistics office reported a surprisingly low 0.4% GDP growth rate in the third quarter of 2021
- Bulgaria has the weakest result in the EU
- For now, the forecasts remain for 3.5% - 4.5% economic growth for 2021 and 2022
Since the beginning of the pandemic, macroeconomic data looked like a weather forecast which says it may be -5° C today, but it feels like +3°C. Quite unexpectedly, Bulgaria turned out to be the country with the lowest economic growth rate in the EU in the third quarter. National statistics reported only 0.4% economic expansion on an annual comparison basis in the third quarter, way below the EU average of 3.9%. The flash estimate does not correspond to the decreasing unemployment, the rate of credit growth and the overall feeling that the recovery has not slowed much.
However, it is important to note that the flash estimates are preliminary and the data is scarce, which is why analysts can only make some reasonable assumptions.
Some of the explanations you will hear from economists are:
- The Bulgarian economy shrank less than the European average in 2020
- The country relied on more conservative aid to businesses during the closures;
- Significant revision of gross domestic product (GDP) data;
- Almost a year-long political crisis in the country;
- Delays to the country's Recovery and Sustainability Plan
- The caretaker government suspended construction projects as part of its 'crusade' against corruption;
- Depletion of goods in stock coupled with difficulties in the supply of raw materials and components for production of new ones.
And while probably each of these factors has an impact, no one can tell how big it is.
The bottom of the rankingsAfter a roaring second quarter in which the Bulgarian economy grew by a staggering 7% year-on-year, the third quarter showed a significant slowdown. With its 0.4 % increase in GDP in July-September 2021, Bulgaria is the slowest growing economy in the EU, Eurostat said.
Consumption remained the main growth driver in the third quarter with an increase of 5.1% year-on-year supported by net exports, while investments fell by 3%.
"In the structure of GDP by the expenditure approach the largest share of 74.9% has the final consumption, which in nominal terms is 26,633.2 million levs. In the third quarter of 2021, gross capital formation amounts to 7,235.8 million levs and has a share of 20.3% in GDP. The trade balance (exports minus imports) has a positive sign", the National Statistical Institute (NSI) said in its flash estimate of the performance of the Bulgarian economy in the third quarter.
Other statistical data points to continued recovery in foreign trade after double-digit declines in some months of last year. Exports of goods by September nominally exceed the pre-pandemic year 2019 but part of the growth is due to the rise in prices of products sold abroad. Exports of goods and services rose by 12.5% and imports of goods and services increased by 11.1% compared to the third quarter of 2020, says NSI.
The summer season was also stronger than last year, but in its latest European economic forecast the European Commission said that "tourists arriving in Bulgaria are 40% less in the peak season July-August compared to pre-pandemic levels".
On the other hand, in nominal terms (before inflation), the GDP growth rate for the third quarter is 9%, and the NSI models for seasonal adjustment or the set deflator may not accurately reflect the actual picture considering the current wide variations in the data. Also, on a quarterly comparison basis, GDP grows by 0.9%.
But this increase has only one engine - consumption, which is also supported by labor market figures. They show that unemployment falls to the pre-crisis level of 4.6%, and the average salary in the country is growing at double digits. Social payments have also been increased, and pension supplements continue to be paid, still outpacing inflation.
The secrets behind the sluggish growth
However, most of these trends are global rather than national and do not provide an explanation for Bulgaria's strangely slow GDP growth compared to all others in the EU.
"Probably half of the explanation is that many countries have seen a much larger decline after the first closure of economies. And most of them have larger budget deficits in response to the pandemic. Obviously, our economy is recovering without large budget incentives, but with the help of the government the recovery is faster ," says Kaloyan Staykov from the Energy Management Institute, a local think-tank. He adds that most of the incentives have been provided through increases of social payments and pensions, while for businesses the help is more limited and not always coming at the right time. Another factor is the lack of projects eligible for upfront financing under the Recovery Plan, as well as the slower absorption of EU funds.
"One of the main problems remains political uncertainty. It is normal for businesses to be a little more conservative while there is no predictability when the economy will close in a new wave of the pandemic, whether there will be compensation for restrictions on businesses and all this leads to postponement of investment plans, hiring new people," adds Staykov.
The revision of GDP data by the NSI also may have an impact. After the revision, the economic downturn in the third quarter of 2020 turned out to be much smaller than originally reported. If the initial estimates pointed to economic contraction of 5.2%, now the fall in GDP has been revised to 2.9%. The data for the second quarter of this year has also been revised, with the growth estimate lowered to 7% from the originally reported increase of almost 10%.
"For the last 6 quarters, the average revision of data compared to flash estimates is nearly 2 percentage points in both directions. Therefore, it is good to wait for the preliminary data in early December," says Georgi Angelov, senior economist at Open Society Institute in Sofia. According to him, the economic recovery has not stopped and will continue: the number of employees continues to rise, exports are growing solidly, and industrial production increased in real terms by more than 10% on an annual basis in both August and September.
What happens after the shockIn recent weeks, many institutions have revised their forecasts for Bulgaria's economic growth, mostly slightly downwards. The expectations for the full year 2021 are concentrated in the area of 3.7% to 4%, and for 2022 a slight acceleration is expected but still below the regional average. Among the main arguments are that the expected boost from the Recovery Plan will almost certainly remain for next year, whereas the risks of low vaccination levels will stay.
The logical question is whether the new NSI data will not change these forecasts, as well as whether there are new risks. Angelov noted that it is normal to expect that the shock from the rise in energy prices in the summer has affected, at least temporarily, some of the companies until they managed to readjust their prices. According to him, it is indicative that the decline in investment is increasing. "Accelerating inflation undermines the purchasing power of households, and this could worsen in January if regulated energy prices rise sharply. This is why a temporary slowdown is logical," the economist says.
The real problem, however, is not that there may be one or two weak quarters due to temporary factors, but whether the economy can grow in a sustainable way in the long term.