EKIP– Expert Club for Economics and Politics A Different Opinion
Highlights:
- Record levels of growth in industrial production and exports for the last few years
- In March, the construction production index grew for the first time since December 2015.
- Retail growth accelerates sharply and reaches double-digit levels
- Producer price inflation is weakening, but consumer price inflation is accelerating
Summary:
In this edition of our macroeconomic monitor (you can read the previous one here ), we chose to first pay attention and emphasize developments in the industrial sector. In March, according to NSI data, the country recorded unprecedented pre-crisis growth in industry, both in production and turnover, specifically in the foreign market. At the same time, positive developments in retail trade continue and growth there accelerated by over 3 percentage points and reached double-digit levels for the first time since the beginning of 2015.
Inflation in manufactured goods eased in March, which is a positive development, but that in consumer goods accelerated for another month. If this trend continues in the next few months, it is likely to lead to a weakening of consumption and lower growth in retail trade. The business climate improved slightly overall, with the most positive forecasts being those of entrepreneurs in the retail trade.
Record industrial growth for the last few years
Following the improvement reported in February, the calendar-adjusted industrial production index accelerated its growth rate in March and reached 5.95% on an annual basis, which is the highest level reported since the beginning of 2013. This growth rate is significantly higher than the EU average, which was 2.4% in March, and thus Bulgaria ranks 9th in terms of industrial growth rate, while in February it was 7th. However, as we can see from the data, this lag in the ranking is not due to a slower growth rate in our country, but to the fact that the growth of industrial production in other member states is accelerating to an even greater extent.
The improvement in industrial growth in March was largely due to a much faster growth rate in the manufacturing sector, which accelerated by over 4 percentage points to 9.93%. This is also a record high for recent years – the highest since early 2011. Meanwhile, growth in the mining sector fell sharply, to 3.72% in March after reaching a three-year record in February. Keep in mind that production growth in the mining sector is very volatile and such sharp variations are not unusual.
Source: NSI
As for the construction sector, there has been a significant improvement, with March being the first month since December 2015 in which the construction production index has shown growth. This long-awaited return to growth after a year-long recession in production in the sector is mainly due to building construction, which grew by 12.05% year-on-year. Civil/engineering construction also improved, but has not yet managed to return to growth, with production in the subsector falling by 1.58%.
Overall, however, the trend in the construction sector in the first quarter of 2017 is very positive and this is mainly due to two factors. First, we cannot fail to mention the significant influence of the base effect due to the strong decline in production at the beginning of 2016. Because the annual comparison base is so low, the dynamics of production in the sector at the beginning of this year appear higher than they actually are. The other factor is of course the renewal of funding for European projects and programs, which was delayed in 2016 and led to the contraction of production in the sector.
Industrial sector exports grow at highest rate since 2011
Source: NSI
Industrial turnover, like production, marked another improvement in March, accelerating its growth rate by nearly 5 percentage points to 15.15% on an annual basis. This is mainly due to significantly higher turnover growth in the manufacturing industry, while that in the mining industry slowed down. A logical development, given the dynamics of production in these sectors in the same month.
As for the geographical distribution of turnover, it grew most significantly in the foreign market and recorded a 34.76% growth in March, reaching the highest level since the beginning of 2011, again similar to the dynamics in production. However, the growth of turnover in the domestic market slowed down by over 1 percentage point to 2.21%. This is an indication that exports, rather than domestic demand, are the main driver of the higher growth in industrial turnover and production.
The largest market for Bulgarian exports is Germany, and our country exports mainly industrial products. The latest data for Germany showed an exceptional jump in imports, and this higher demand on the German market is probably the main factor behind the serious jump in our industrial turnover in the foreign market.
Retail growth continues to accelerate
Turning to retail trade, we notice a significant improvement in the growth rate. The growth of the calendar-adjusted retail trade index excluding motor vehicles, motorcycles and fuels seriously accelerated by over 3.5 percentage points and reached 10.82% in March. This level of growth in our country is once again above the EU average, which was 2.7% in the same month. In addition, Bulgaria managed to climb the ranking and in March the growth of retail trade excluding motor vehicles, motorcycles and fuels in our country was the highest for the entire EU. Overall, the first quarter of 2017 stands out as one of the best first quarters in the sector in recent years.
Source: NSI
Retail trade in non-food goods including fuels also significantly accelerated its annual growth rate, reaching 5.35% in March, while the growth rate of trade in non-food goods excluding fuels accelerated by over 5 percentage points, reaching 13.64%. Both values are above the respective EU averages and mark a significant increase from the slower growth rates reported in February. Specifically, as regards retail trade in non-food goods excluding fuels, growth in this category of goods reached its highest level since December 2013. At the same time, trade in food, beverages and tobacco also grew at a higher rate in March (by around 0.8 percentage points), reaching 7.30%.
The NSI's more detailed breakdown shows that in March, retail trade in computer and communication equipment returned as the most traded category of goods, after its sales increased by 20.5% year-on-year. The other categories of goods also saw growth in turnover, with the sole exception of retail trade in automotive fuels and lubricants, which decreased by 12.5%.
Inflation in manufactured goods weakens, that in consumer goods increases
After reaching record levels for the last four years, annual producer price inflation finally slowed to 4.09% in March from 5.87% in February. At the same time, consumer price inflation continued to accelerate, reaching 2.59% in April. Despite this opposite dynamic, inflation in both consumer and producer prices in Bulgaria remains higher than the EU average, continuing the trend that began at the end of 2016.
The decline in the rate of producer price inflation in industry in March was due to a sharp decline in price growth in the extractive industry and a more moderate one in prices in the manufacturing industry. Inflation in the extractive industry was 12.49% in March, which is almost 8 percentage points lower than the level in February, and that in the manufacturing industry was 5.67%, having been 8.20% in February. Inflation in prices of intermediate consumption products is also weakening, as is that in prices of energy and investment products.
Source: NSI, BNB
However, the dynamics for consumer goods are quite different. The largest contribution to the higher overall level of consumer inflation in April was made by food products, whose price inflation increased by nearly 1 percentage point to 4.90% on an annual basis. However, non-food prices increased by 2.68% in April, which is a slightly slower rate than the 2.88% reported in March. The highest inflation continues to be in transport prices, which accelerated to 8.32% in April. Within the period January-April, transport price inflation accelerated from 2.18% to the current level, which is the sharpest acceleration in the inflation rate of any category of goods. This acceleration in the level of consumer inflation in April is logical in the context of the rapid growth in retail trade in March, which accelerated by 3 percentage points.
It should also be noted that deflation in the services sector is finally starting to ease, and significantly so, with April's rate at just 0.05%, down from 1.51% in March. This was the only major sector where prices continued to fall despite the sharp acceleration in inflation in the December-March period. With this sharp slowdown in deflation in this sector in April, it is very likely that we will finally see inflation in this sector next month.
In terms of lending, March saw a continuation of the trend from the previous four months. The growth of loans accelerated and reached 3.33%. The biggest contribution to this this time was made by lending to non-financial enterprises, which accelerated to 2.54% from 1.85% in February. Meanwhile, lending to households marked a very slight acceleration in its growth and reached 4.65% on an annual basis. Consumer lending continues to grow at a faster pace than housing lending. In March, these two types of household loans grew by 3.30% and 2.38%, respectively.
The acceleration in lending to non-financial corporations is likely to put pressure on prices of manufactured goods next month, which could lead to higher inflation in the industrial sector. The strong growth in lending to households, and in particular consumer credit, over the past few months is very likely to be a major factor in the higher growth in retail trade turnover and consumer goods prices.
The fact that inflation in the prices of manufactured goods is slowing down is a positive development for the industrial sector. As we have mentioned in previous issues of the macroeconomic monitor, excessively high levels of inflation in manufactured goods can lead to an excessive increase in producers' costs, which could lead to layoffs and, in the worst case, bankruptcies. As for the acceleration in consumer inflation, if the trend continues, it could gradually lead to a weakening of consumption and, accordingly, lower growth in retail turnover.
The business climate is improving moderately
The state of the economic situation generally improved in April. The business climate was higher in all sectors except industry, with the most significant improvement being seen in retail trade.
Source: NSI
The retail business climate index rose by 2.1 points, mainly due to improved expectations of traders for the business situation of their enterprises over the next six months. The forecasts of entrepreneurs in the sector regarding the volume of sales and orders to suppliers also continue to be optimistic, while no increases in selling prices are expected on a monthly basis over the next three months. The most risky factors for the development of enterprises in the sector are insufficient demand, the uncertain economic environment and the high level of competition.
In the industrial sector, the business climate index is falling very slightly, mainly due to more moderate expectations for the levels of production activity in the next three months. Due to these more moderate expectations, it is logical to assume that the record levels of industrial growth reported in March will most likely not accelerate and will even weaken. Here, as in retail trade, according to entrepreneurs, the uncertain economic environment is a leading risk factor for the development of enterprises in the sector. In second place is the shortage of labor, the negative effect of which on the development of the sector has been increasing in the last month (April), according to the NSI survey.
As for construction, we see another expected improvement in the business climate, due to more favorable expectations for the future business situation of enterprises. Forecasts regarding construction activity also remain optimistic. These positive expectations are largely due to the fact that the production schedule is secured with contracts for a longer period of time compared to three months earlier. Here, as in other sectors, the uncertain economic environment is seen as a major risk to growth, and labor shortages also intensified their negative impact in April, similar to the situation in industry.
In the services sector, the business climate is improving slightly, mainly due to a higher assessment of the current trend in demand for services. However, the expectations of entrepreneurs in the sector for the next three months are more reserved than before. Overall, the sector expects sales prices to remain at the same level over the next three months.
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