Consumption Starting to Power Up Bulgaria's Economy - Raiffeisenbank

A graph from the Raiffeisenbank macroeconomic report in January 2012: exports (green); consumption (yellow); imports (purple); investments (blue); GDP dynamic (red line).

Domestic consumption has become the main engine of economic growth in Bulgaria is the third quarter of 2011, according to data presented in the monthly macroeconomic analysis of Raiffeisenbank Bulgaria.

The third quarter saw a shift in the structure of growth in the Bulgarian economy, with domestic demand now being the most powerful factor, the analysts of Raiffeisenbank Bulgaria said in their report published Monday.

In the third quarter, Bulgaria's economy grew by 2.3% year-on-year.

At the same time, savings have seen a decline as a share of GDP for the first time since the start of the economic crisis in 2008, with indications that demand will remain the primary factor for growth in Bulgaria in the fourth quarter.

The Raiffeisenbank economists stressed that Bulgaria had surprisingly low inflation in November.

"However, it would be hard to allege that the reason for that is a sharp drop in demand. What is more, since Bulgaria's trade balance in October was negative as a result of the steep increase of imports, rather, it is logical to expect that the data for Q4, which are to be published, will demonstrate a continuing recovery of domestic demand," the report said.

"Against the backdrop of the shocks in Europe, the development of the Bulgarian economy seems stable, though it is far from what is desired. Public finances are in a very good condition, labor productivity has grown by more than 5% for a sixth consecutive quarter, and there is a rise in consumption," commented Raiffeisenbank Bulgaria's chief economist Kaloyan Ganev.

"However, the positive rate of GDP growth should not be overstated since there are still serious problems in the economy which haven't been overcome. For example, the growth in investments in the third quarter of 2011 is entirely due to the accumulation of reserves, and not to investments in major capita," he explained.

"It is hard to interpret this fact as a signal that the economic cycle is turning around since it might be the result of overestimated sales potential by traders. Foreign direct investment in processing industry is declining, which shows that companies prefer to pay off their old debts instead of making new investments in manufacturing. Let's not forget the condition of the labor market and the risks for the Bulgarian economy coming from the euro zone," Ganev added.

The macroeconomic report of Raiffeisenbank Bulgaria pointed out that domestic consumption increased by 5% in Q3, replacing exports as the leading contributor to the GDP growth. Savings declined to 25.1% for the first time since the start of the recession.

Bulgaria's November inflation went up 0.3% compared with October, driving down the average yearly inflation to 4.4%.

In the third quarter, Bulgaria's labor productivity went up by 5.7% year-on-year, the sixth consecutive quarter with a growth greater than 5%.

Bulgaria's budget deficit in the first 11 months of 2011 reached 1.4% of the GDP, which is substantially lower than the 2.5% projection for the year. The fiscal reserve amounted to BGN 5.3 B.

Raiffeisenbank reminded that in December Fitch Ratings confirmed Bulgaria's credit rating at BBB-, changing it from a positive to a stable perspective, and Standard&Poor's confirmed Bulgaria's rating at BBB, preserving its stable perspective.

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