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Characteristics of a slowing down economy

Industrial production shrank for the third consecutive month on an annual basis, with a drop accounted in all three major economic sectors: mining (-1.3%), manufacturing (-0.8%) and production and distribution of electricity and heating (-4.6%). Generally, the light industry and those sectors involved in low value-added production are the most affected, while the high value-added sectors are growing. The conclusion that can be drawn is that low-cost industries, those mostly relying on cheap labor contract due most likely to the reduced demand in Bulgaria’s main trade partners, while the growth of the high value-added producing sectors is precisely due to the lower costs in Bulgaria and the reorientation of the production of Western companies to their local counterparts, precisely because of the increased price competition in their main markets.

Figure 1. Change in the industrial production index compared to the corresponding month of the previous year (Calendar adjusted data)

Retail trade, although declining on a monthly basis (-0.3%), recorded a year-on-year growth (2.0%), with the highest growth being recorded by internet trading (11.3%). It is specific for the retail industry that consumer demand responds with a lag to the major macroeconomic developments and the recorded monthly decline is likely to be reflected in the annual data very soon. At the same time, it should be borne in mind that increased internet trade is most likely not fully accounted for by the national statistics, which explains to some extent the significant decline in imports, which does not correspond to the trade data.

Figure. 2. Change in turnover in the section “Retail trade, except automobiles and motorcycles” compared to the corresponding month of the previous year (Calendar adjusted data)

Finally, construction also declined on a monthly basis (-0.2%), mainly due to the decline in civil/engineering construction (-1.6%), which has a very serious impact on economic development, while building construction grew by 0.8%. On an annual basis, construction output increased by 3.4%, again driven by building construction (8.9%), while civil/engineering one declined by 3.6%.

Figure 3. Change in construction output indices compared to the corresponding month of the previous year (Calendar adjusted data, 2015 = 100)

All this draws a picture of a slowing down economy whose major sectors contracts, with non-tradable sectors at the forefront, such as building construction and financial services, which create conditions for unsustainable economic growth and a false sense that the economic situation in the country is stable. With the ongoing deterioration of the international environment, it is a matter of time before the negative economic processes are brought to Bulgaria and the lack of adequate political measures can only contribute to the deterioration of the situation!

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