Bulgarian Economy…

The Bulgarian economy continues to contract. Data from the National Statistical Institute was recently published, showing that for the first time in the new millennium, our country registers two consecutive quarters of GDP decline (on year-to-year basis). This information won't surprise anyone, but it still provoked many comments and a lot of noise. We can add many other indicators to the GDP drop, but it might be enough to say that the unemployment rate continues to rise in order to understand that the situation hasn't changed much and things are getting worse.

However, there are some reasons for optimism. The data reflects what has happened in the past months, and this is important, but at the same time this tells us almost nothing about the development of the crisis to the end of the year, and after that. Our expectations for the next months should not be founded on such kind of information (what happened on the first two quarters), but on the policy of the new cabinet, which can have serious impact.

It is not by chance, that the spending cut announced by the new cabinet was quoted by international media (including Wall Street Journal) and drew attention to the country. It is exactly this kind of news, which is much more important, because it can bring back investors confidence, which suffered a lot from the silliness of the previous administration. The "Stanishev plan" did not achieve anything but wasting huge amount of our money. The main goal – "promoting employment" – was a failure.

Spending cuts are taking place, but during this week we also found out, that "this is the maximum". Mr. Djankov announced, that most of the expenditures in this year cannot be cut, because otherwise the economy would be under threat. This statement is very doubtful. The biggest part of government spending (with or without cutting – still on a record level) is not only inefficient, but completely unnecessary. The fear of cutting them to keep the level of demand high (thus supporting different indicators like the GDP) is not founded at all. It is like spending money on a bridge between two cities on the same plain, which is absolutely foolish, with the only purpose of keeping demand high and safeguarding employment. The truth is, that if a given expenditure is not necessary (or inefficient), it should not be done, no matter if there is a crisis or not.

Amid all this information and news about our economy, questions are raised from all corners: "What happens with the crisis?" and "When are we going to recover?" In my opinion there are months ahead, in which we will be recovering and at the same time we will have the feeling that everything is getting worse. This might sound a little strange, but it is very likely to happen.

Firstly, many of the effects of the crisis come late. The decline in the industrial orders and limited access to credit are major issues facing each company, but they don't result in immediate bankruptcy. Companies can use various mechanisms to "postpone the inevitable" – delaying credit payments, forcing short-time work or simply delaying all possible payments (including wages). Either way, most of these firms will be forced to close, which will result in higher unemployment rate. This tendency can be observed now too, but it is very likely to reach its peak in the first months after the summer.

This means that from now on until year-end, the effects of the crisis may become even more visible (especially for those businesses, which will close or remain without orders). On the other hand it is very likely that reverse processes of revitalization will start. That is, foreign investment will gradually return, trade will increase, lending will revive (with lower rates) and new business ideas will be implemented. In other words, until the end of the year, our economy will start moving again, but the effects will not be visible before the beginning of the next year. A calmer 2010 is possible, but the government must follow the principle of "clear rules and less spending". This type of policy would be much more successful than any anti-crisis plan.