EKIP– Expert Club for Economics and Politics A Different Opinion
Highlights:
- In the first quarter of 2017, the average salary grew at a record pace for the last 7 years
- Average wages are likely to continue to grow at a similarly rapid pace for the rest of the year
- Employment reaches one of its highest levels in the last 10 years
- Exports are growing at the highest rate since 2011, but imports are growing faster on an annual basis
- Investment in physical capital is down slightly overall, but significant growth is being reported in industry
- The macroeconomic picture in the country is one of the most positive in the last 5-6 years.
Dear readers, we at EKIP are pleased to present you with the first expansion of our newest column "Macroeconomic Monitor". While in the monthly edition we present you with our reading of the latest monthly data published by the NSI and the BNB for a number of key sectors of the Bulgarian economy, within the framework of this quarterly edition we will take a look at the (logically) most important quarterly data published by the NSI.
In our opinion , the most significant quarterly indicators measuring the pulse of the country's economic development are the data on the employment rate, the average wage rate, the costs of enterprises for the acquisition of long-term tangible assets (i.e. investments) and of course foreign trade (imports and exports). In the future, we may include other indicators within the framework of this analysis, if we consider them to be important enough and, above all, if there is a high interest from you in them. The data analyzed within the quarterly and monthly editions are sufficient to present a relatively detailed picture of the macroeconomic situation in Bulgaria.
To begin with, we will pay attention to the level of the average wage (gross) in the country by economic activities. The level of average wages is perhaps the most appropriate indicator for measuring the overall economic well-being of a country, because it shows us what remuneration people receive for their work, which is one of the most direct and simplified indicators of economic well-being. And in statistics, we should always look for indicators that are as direct and simple as possible, because this minimizes the likelihood of misinterpreting them. For these reasons, the dynamics of the average nominal wage in Bulgaria is the headline indicator in this premiere edition of the quarterly version of our macroeconomic monitor.
The average salary is growing at a record pace for the last 7 years
According to NSI data, in the first quarter of 2017, the average salary in the country reached 1,006 leva. This means that it increased by 9.11% compared to the level in the first quarter and by 1.6% compared to the level in the fourth quarter of 2016. This growth rate of over 9.0% on an annual basis is the fastest at which the average salary has grown since 2009. That is, the growth of the average salary reached its fastest level since before the beginning of the first serious crisis period for the Bulgarian economy in the last decade.
The most significant wage increase was recorded in professional activities and scientific research – 13.40% in the first quarter. Real estate operations (12.64%), administrative and support activities (12.50%), trade and repair of motor vehicles and motorcycles (11.85%) and creation and dissemination of information and creative products (10.45%) were the sectors with double-digit growth rates for this sector. The high level of wage growth in trade is an expected development, given the high consumption and the jump in retail turnover that was recorded in the first three months of this year. As we mentioned, of the four largest sectors (industry, services, retail trade, and construction), it was retail trade that recorded the fastest overall growth rate in early 2017.
Source: NSI
At first glance, the record-breaking average wage increase in recent years can be interpreted as a very positive development, but we must be careful. This increased wage growth may also be an indication that bubbles have appeared in some sectors of the Bulgarian economy, as was the case in the years immediately before the crisis - 2009 was actually such a pre-crisis year, during which the average wage level grew at double-digit rates.
This growth, however, was unsustainable because it was a consequence of the highly expansionary monetary policy of central banks around the world, which stimulated a huge surge in the level of investments, which also spilled over into Bulgaria. However, these investments were not sustainable because they were not secured by a decline in consumption and saving of real physical resources, but only by money printed by central banks.
This led to increasingly rapid inflation in the prices of physical capital and wages in these sectors, as firms used the cheap credit printed by the central bank to compete with each other for increasingly scarce physical capital and labor. This led to very rapid but very unsustainable growth in the wage rate. At some point, this influx of increasingly cheap credit stopped, and the result was that a short period of prosperity was followed by inevitable bankruptcies and layoffs, which led to higher unemployment and, of course, a decline in the wage rate.
We should not be too enthusiastic about the fact that the average wage in the country is already growing at rates similar to those reached before the global economic crisis hit Bulgaria. This may be the result of the formation of another unsustainable bubble, given that in recent years central banks around the world have lowered interest rates to historic lows and attempted to initiate an unprecedented credit expansion.
In the short term, we at the EKIP believe that wages will continue to grow, probably at an increasingly faster pace in the coming quarters until the end of 2017. However, if this is due to a bubble, this trend could reverse abruptly. Therefore, it is very important to monitor the situation at the international level. Since, on the one hand, we are a small country, and on the other hand, our central bank cannot conduct an autonomous monetary policy (due to the currency board), our economy follows trends at the international level and specifically at the EU level, where our main trading partners and investors are concentrated.
Employment reaches one of its highest levels in the last 10 years
Let's take a look at the dynamics of employment in the labor market. In this analysis, we will focus on the employment rate as a key indicator of the health of the labor market in Bulgaria. The reason for preferring quarterly employment data over monthly unemployment data is as follows:
Unemployment rate data only show what proportion of citizens are looking for work but cannot find one. Employment data, however, show what proportion of the country's population is economically employed. This presents a more complete and detailed picture of the state of the labor market in Bulgaria. Unemployment data only refer to a part of the population, specifically that part that is economically active and registered with the labor office, while employment data cover the entire population of the country.
Source: NSI
Let's see what the numbers show. According to the National Statistical Institute, the employment rate in the first quarter of 2017 increased by 2.07% year-on-year among the total population, which puts the employment rate for the population between 15 and 64 years old at 64.3%. This is the highest employment rate since the third quarter of 2015. Among the age groups under 65, employment increased the most in the groups between 45-54 and 55-64, by 3.11% and 3.78%, respectively. Youth employment in the age group between 15 and 24 is also growing, by 0.68% year-on-year, and this is the first employment growth recorded in this age group since the first quarter of 2015.
This year, we can expect a more significant contribution from the construction sector to employment growth due to the renewed financing of EU projects, on which it is heavily dependent. The lack of growth in the sector in 2016 was due precisely to the delayed financing of such projects, which also led to lower demand for labor from construction companies. This will change in 2017 and we are already seeing the first indications.
Overall, employment data show a significant improvement in the first quarter of this year and indicate that the state of the labor market is quite good. The employment rate reached in early 2017 is one of the highest in the last 10 years, which is a very positive development. In addition, after a decline throughout the second half of 2016, growth and a significant improvement in youth employment were reported in early 2017. This positive dynamics of the labor market in our country generally follows the positive trends in the rest of the EU. Going forward, the ECE expects employment to continue to grow or at least to remain very close to the current level in view of the positive developments and improvements in the business climate in the main sectors of the economy .
Exports grow at fastest pace since late 2011
Having analyzed the dynamics of the labor market, we turn to the country's foreign trade. We chose to analyze foreign trade data within the framework of our quarterly edition of the Macroeconomic Monitor because we believe that quarterly data present a more complete and detailed picture of trade dynamics compared to monthly data. Monthly trade data are often highly volatile and, if analyzed month by month, it is difficult to make a deep analysis of any longer-term trend.
The first quarter of 2017 is shaping up to be a very strong one for Bulgarian exports. Exports grew by 14.84% year-on-year, the highest level since the end of 2011. This level of growth was preceded by an 11.93% increase in the fourth quarter of 2016, which, as you can see from the graph, points to a serious improvement in the country's exports over the past six months.
Source: NSI
Imports, however, are growing at an even faster pace. In the first quarter, imports increased by 20.63% year-on-year, which marks a very sharp acceleration from the level reported in the fourth quarter of 2016 - 5.12%. This jump in imports is most likely due to significantly higher consumption in the first quarter of 2017. Monthly retail trade data for the period January-March definitely indicated significantly higher consumption, which is why retail trade was overall the fastest growing sector at the beginning of this year. The jump in consumption probably also accounts for the jump in imports.
Despite recording record growth in recent years, exports failed to outpace imports, and as a result, the country's trade deficit increased significantly on an annual basis and reached 1.07 billion leva. It should be noted, however, that this deficit is 2.3% lower than that reported in the last quarter of 2016, so in the short term this is actually an improvement. Going forward, we can expect the increase in exports and imports to continue, if the positive trends in consumption and production in the first quarter of 2017 are maintained in the second. For now, there is no reason to expect anything different, given that the international economic environment is also improving, especially within the EU.
Investment in physical capital shows a slight decline
Finally, in the first edition of the quarterly version of our macroeconomic monitor, we will pay attention to a very important, but unfortunately often neglected indicator - the cost of acquiring long-term tangible assets. This indicator practically shows us what the level of investment in physical capital was in the country within a given period of time - in this case, a quarter.
This is a very important indicator because physical capital, along with labor (and land), are the main factors of production used in absolutely every production process. The use of more such capital increases the productivity of workers, which subsequently increases economic growth and leads to higher real incomes. Therefore, investments in physical capital are very important for maintaining and accelerating the growth of an economy.
Unfortunately, the NSI database only has quarterly data on the costs of acquiring fixed assets from the beginning of 2016. This allows us to analyze the dynamics on an annual basis, but unfortunately does not allow us to analyze longer-term (annual) trends and compare current growth/decline levels with those before 2016 (the NSI only has annual data for the period before 2016). This is a serious limitation, but we believe that this indicator is too important not to consider it within the framework of our quarterly analyses.
Source: NSI
NSI data show that the cost of acquiring fixed assets as a whole fell on an annual basis in the first quarter of this year, at a rate of 0.21%. This decline is much more significant on a quarterly basis. Investment in physical capital fell by 38.67% at the beginning of this year, compared to the last quarter of 2016.
On an annual basis, the largest decline was recorded in construction, which is a completely expected development, given the delayed financing of EU projects. As we have repeatedly mentioned in the monthly editions of our macro monitor, the construction sector is highly dependent on an influx of investments under EU funds, which were delayed in 2016 and are only being renewed at a faster pace this year. Going forward, in the rest of 2017, we will most likely witness significantly higher costs for the acquisition of tangible assets in this sector.
The second most significant decline in the cost of acquiring tangible assets is the public sector. The decline in investments in this sector is most likely also due to the delay in EU financing - as we know, the public sector is perhaps the most dependent on the inflow of investments from EU funds.
While in these sectors the expenditure on tangible assets is falling, in agriculture, industry, professional activities, and the financial sector, as well as real estate transactions, stable growth rates are reported on an annual basis. The growth of investments in the industrial sector is something to be expected given the acceleration in the growth of industrial production and turnover in the first three months of the year. Given the accelerated turnover in the sector, especially in the external market, it seems likely that investments will continue to rise in the second quarter of this year.
