Bulgaria's GDP growth quickens to 1% y/y in Q4 2013 - flash estimate

By bne IntelliNews February 14, 2014

Bulgaria's real GDP growth accelerated to 1% y/y in the fourth quarter of 2013 from 0.7% y/y in Q3, achieving the fastest rate of increase since the first quarter of 2012, according to the flash estimate of the statistics office.

The print is in line with the central bank's anticipation that a simultaneous improvement of domestic and external demand will boost growth at the end of last year.

In seasonally-adjusted terms, the GDP was up 0.4% q/q in Q4 following a 0.5% rise in the previous quarter.

The bounce in the growth momentum is due to a higher level of final consumption expenditure, which rose 1% y/y in Q4, accelerating from 0.4% annual growth in Q3. Exports also helped pull up the GDP figure as sales abroad of Bulgarian goods climbed 9.4% y/y in Q4 after increasing 8.5% y/y in the previous quarter.

The quickening growth of consumption expenditure was due to a slower decline of private spending, which fell 0.3% y/y in Q4, narrowing from a 1.2% y/y drop in the previous quarter. The pace of increase of government expenditures slowed to 2.9% y/y in October-December from 3.9% y/y in July-September. Furthermore, the value of purchases that contribute to gross capital formation was down 0.7% y/y, while imports climbed 4.8% on the year.

Despite the rise in economic activity the statistics office's latest labour force survey showed that total employment declined by 20,200 people from a year earlier but the employment to population ratio remained unchanged at 47% because of a downward change in the size of the working-age population. Most of the jobs lost were high-skilled jobs in manufacturing, electricity generation and construction - the three branches of the economy that are an integral part of the industry sector.

While employment in these branches declined, the output of the industry sector grew by 1.3% y/y in Q4. However, for some reason entrepreneurs in the above-mentioned industries began to perceive existing wages as higher than the marginal value product of their hired labour. Even though demand for the sector's output increased from last year and production expanded, managers decided to shrink their payroll.

One way to interpret these dynamics is that the revenue the industry sector earned for its output at the prevailing market price was not sufficient enough to allow it to keep the entirety of its workforce. Even though demand for manufactured goods rose from a year earlier (judging by the improving exports data), supply-side pressure on the price of ore and other industry commodities, coupled with regulatory cuts in electricity charges and the continuing housing crisis, kept prices in the sector low. This, in turn, led managers to restructure their labour resources.

The optimisation of costs via job-cutting also indicates that industry managers have a pessimistic outlook about the short- to medium-term period (implied by the transaction costs of hiring they will have to incur when they begin to perceive existing wages as relatively low).

In October, the government lowered its economic growth projection for 2013 to 0.6% from an earlier estimate of 1.0% due to revised expectations of the level of domestic demand. In addition, both the IMF and the EC have cut their GDP growth forecasts on Bulgaria to 0.5% in 2013, down from previous estimates of 1.6% and 0.9%, respectively.

The Bulgarian government forecasts 1.8% GDP growth in 2014, which is slightly more optimistic than the IMF's projection for 1.6% economic expansion. On the other hand, the European Commission expects the country's aggregate output to rise by 1.5% this year.

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