Economic Policy Review ISSN 1313 - 0544

GDP During The First Quarter Of 2007

Author: Dimitar Chobanov / 27.06.2007
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Lately the National Statistical Institute (NSI) released preliminary data about the gross domestic product (GDP) and its components for the first quarter of 2007. The tendency for real growth above 6% continues and this signifies a stable pattern of economic development for Bulgaria.

The serious revision of the data which preceded the results of the national accounts during 2006 did not fundamentally change the analysis of the macroeconomic developments as it usually happens during the last several years in Bulgaria. Nevertheless, it is a useful lesson for the economic analysts that the preliminary data can lead to far from correct interpretations of some processes. Besides, the revision impedes the processes of modeling and forecasting because it leads to interruption of the time series especially when the data for 2002 has not been revised yet.

The real growth of the GDP is 6.2% and the growth of the gross value added (GVA) is 7.7%. This rate of change of GVA is record-breaking and the greatest contributors are the industry and the service sectors which register real growth of 7.6% and 8.1%, respectively. This is reflected in the amendment of the structure of the value added. The share of the industry increases with 1.3 percentage points while the shares of the service and agricultural sectors decline with 1 and 0.3 percentage points.

For the first time since 2004 there is real growth in value added of the agricultural sector which may signify for its revival. One of the substantial factors for the decline in production during 2005 was the unfavorable weather. Nevertheless, the bad weather conditions could not be a reason for the negative growth during the next year. The lack of investment, long-run strategy because of bad management, and the parceled-out land contributed for the decline in production, which actually had the purpose to ‘protect' the home production. Since the beginning of 2007 and due to Bulgaria's accession in the European Union, such restrictions cannot be imposed, and this fact forces the Bulgarian producers to try to be more efficient. This will have positive influence in the long-run, but at the same time, the expected subsidies from the European funds may have just the opposite effect. After all they will cooperate and draw more investment in the agricultural sector, which by itself ay improve its condition.

The industry and services sectors continue their stable growth and the services again contribute to the greatest degree toward the value added in the economy. Therefore, it is quite logical that in these two sectors the greatest amount of investment is concentrated, and it grows with 35.9% in ream terms relative to the first quarter of 2006. This is a precondition for increase in the growth of the GDP in next periods because it increases the potential of the economy to produce more goods and services. Increase production, by itself, will affect the consumption and export sides in the next quarters.

The consumption also increases its rate of growth, going as far as 7%. This is primarily due to private consumption which grows with 8.1% in real terms. Nevertheless, in nominal terms the share of consumption in the GDP has decreased on annual basis from 88.3% in 2006 to 86.1%. This leads to slight increase in the relative share of the gross savings[1] from 15.8% of GDP for the first quarter of 2006 to 16.4%.  

The strong growth of investment leads to increase in the current account because this investment is financed by foreign savings. According to data from NSI the real growth of exports is 2.2% while that of imports is 13.2%. The slow-down of the export growth may result in lower competitive power of the Bulgarian producers or insufficient accountability of the export side. The reliability of the data for the foreign trade is under close scrutiny for a long time and Bulgaria's membership in the EU is an additional factor which influences the situation and hampers the gathering of information.

The factors which exhibit positive influence on the economic growth during the last couple of years are the reforms toward individual and economic liberty. In this sense the reduction in the corporate tax turned out to be a mighty booster for investment. Besides, the effect of lower social security contributions starting from the beginning of the previous year also played a significant role. The surplus in the budget allows for even further reduction of the direct taxes, taking into consideration the fact that there is increase in the excise taxes for particular groups of commodities for the last several years. The overall result is that the tax burden almost does not change, thus the possibility for stronger stimulation of the economic activity is left out.

The reforms in the expenditure side of the budget are again very slow or absolutely dismissed. This affects the health system, the education, the public administration, the police force, the judicial system, etc. The expenditures in those spheres increase every year without substantial increase in their performance, and this is a stimulus for their inefficiency. The state does not carry out its functions in proper way-functions such as protection of property rights and the lives of its citizens. At the same time, the state tries to supply other services, which can b provided by the private sector with much lower expenditures.

The international practices (Ireland for example) show that given the necessary reforms, the economic growth can be accelerated significantly and more important, it can be kept high for a continuous period of time. This will allow the level of real income (adjusted for price differentials) in Bulgaria to get as high as the average for the European Union in the near future. At the moment, it is pretty low- hardly 39.5% from the average income level for EU-27(37.8% from the average for EU-25[2]). Given these conditions, the higher and continuous economic growth should be a major priority for every government. This can b achieved only through higher economic liberalization, lower taxes and social security contributions, lower levels of regulation for the business and alleviation of the excise duties, improvement of the labor market flexibility and protection of property rights.


[1] Gross savings is the difference between the gross disposable income and the consumption

[2] Data from Eurostat