Bulgarian domestic demand gains some traction in Q4 2015

The National Statistics Institute has published a revision of the "flash" estimate of developments in GDP in the fourth quarter of 2015 and the full year. According to unadjusted data, GDP grew by 3.0% year on year (y/y) in the fourth quarter and the year as a whole. Based on the sum of seasonally and workday-adjusted results for the four quarters of the year, however, the overall GDP growth rate came in at 2.8%. This was a marked acceleration from the 1.7% growth achieved in 2014 and, as discussed further below, was primarily explained by growth in net exports of goods and services. On the other hand, the annual data show that growth was more evenly distributed across expenditure categories in 2014 than in 2015. Nevertheless, after several quarters in which there was little evidence of a robust rebound developing in domestic demand in 2015, at least by the final quarter, it seemed as if domestic demand began recovering more substantially.

Turning to the breakdown of GDP by expenditure categories, the quarter-on-quarter (q/q) growth of individual consumption and fixed investment in fourth-quarter 2015 is notable. However, for the year as a whole, growth in individual consumption came in at just 0.4% y/y while gross fixed capital formation actually declined by 0.4%. Clearly, the most dynamic component among end-uses in 2015 was exports of goods and services, rising at a healthy 7.1% y/y compared with a more moderate 3.8% recorded in 2014. At the same time, in the face of relatively muted domestic demand, imports of goods and services grew at a slower 4.5% and the resulting increase in net exports supplied the dynamics to overall GDP in 2015. Clearly, a portion of the impetus to imports was the requirement for inputs from abroad for export production. The sharpest uptick in exports was registered in the first quarter of 2015, with an impressive y/y increase of 13.6%. Exports retreated on a q/q basis in the second and third quarters of the year, but expanded again in the fourth quarter at a hefty 5.6%. Imports followed a similar pattern during the four quarters of the year, slipping on a q/q basis in the second and third quarters and rising at 3.9% q/q in the fourth.

Looking at the breakdown of GDP by producing sector, agriculture and construction were a drag on overall growth for the year. Although gross value added in the construction sector expanded again in the second half of 2015, agriculture contracted rather sharply in the fourth quarter, even on a seasonally adjusted basis. In contrast, the industrial sector performed relatively well, with value added in that sector growing at 3.5% y/y in the fourth quarter and 3.3% in full-year 2015 on a seasonally and workday-adjusted basis. Unfortunately, gross value added in the service sectors, by far the largest component of total gross value added, lacked dynamism in the second half on a q/q basis and in the fourth quarter on a y/y basis. The public administration sector was a major drag on the result for all services, including education, healthcare, and social work. Value added in the public administration sector typically represents primarily wages and salaries of public-sector employees.

Outlook and implications

Hopefully, the signs of gathering strength on the demand side in individual consumption and fixed investment seen in the closing months of 2015 will play out further in 2016 together with a continued sizeable contribution from net exports. Bulgarian exports are being boosted by the ongoing recovery of the major economies of Western Europe as well as continued expansion of Central and Eastern European economies. Although Russia is not a major market for Bulgaria, as most exports are destined for the European Union, some dampening of export prospects will still be due to the ongoing recession in Russia and its impact on other CIS countries. On the domestic front, real wages should be rising in train with the expanding economy and therefore continue to support household consumption. Together with continued strong external demand, rebounding domestic consumption should spill over into improved business sentiment and expectations, and hence plans for new investment. Of course, more dynamic domestic demand implies an offsetting boost to imports of goods and services. IHS currently projects growth of GDP in 2016 at a similar 2.9%, accelerating to 3.1% in 2017.