Economic Policy Review ISSN 1313 - 0544

GDP in the Second Quarter of 2006

Author: Dimitar Chobanov / 29.01.2007
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The National Statistical Institute (NSI) has released data for the gross domestic product (GDP) for the period from the beginning to the end of June 2006. The real GDP growth for the second quarter relative to the corresponding period of 2005 was 6.6%, which is the highest value of this indicator since 1998 when the growth rate was high due to the recovery of the economic crisis. The real growth rates continued to be above 5% since 2004 and have even accelerated. However, one should consider the preliminary character of the data before making any general conclusions.

The causes for this positive development can be found in the economic policies implemented since 1997 when some pro-market reforms were undertaken. These are the introduction of the currency board arrangement, which relieved the inflation expectations and provided stability to the Bulgarian lev so it could be used as a medium of exchange without baring a substantial depreciation risk. Thus the uncertainty concerning the price dynamics decreased which considerably cut the expenditures of citizens and companies to hedge from the influence of inflation.

However, sound money itself is not enough for the acceleration and maintenance of high economic growth rates. The rest of the reforms that were aimed at expanding the economic liberty also contributed to the achievement of better results. Privatization, although incomplete, is one of the reasons for the rising efficiency of the economy as unproductive jobs were cut and the released human and physical capital was directed to more profitable activities.

Another factor that had a positive development was the removal of some obstacles to the exchange and especially to the external trade where some excise duties and other limitations were reduced or removed thereby enabling Bulgarian consumers greater opportunities to choose between different goods and services. Apart from this companies in the country confronted stronger competition in the internal as well as the international markets because in many industries, they were no longer “protected” by the government. Thus they were forced either to produce more efficiently, at lower costs or more qualitative products, or to drop out from the market.

Another factor for realization of positive economic growth was the free movement of capital from and to the country. This condition was directly related to the steady functioning of the currency board arrangement as well as the integration of Bulgaria to the European Union. Formation and attraction of capital was the basis for the acceleration of economic development and the capital account liberalization was a crucial factor for this.

Along with the progress in some areas, during the last years there was a stagnation or even deterioration in others. For example, the judicial system and the police force did not succeed in providing the necessary security to individuals and protection of their property. Similarly, investors bore higher risk because the process of debt collection was very slow as well as more expensive than the average for the European countries.

Another area deserving a special attention is education. It is aimed at preparing persons for labor market participation by making them more flexible and accommodating. However, centralized governance, obsolete programs and resistance to any changes in the system led to worsening results in international comparisons. The connection between the actual demand by companies and supplied skills and abilities by persons was missing because the education is inadequate. In the long term, this could restrict the opportunities for economic growth. Moreover, even at present there is a deficit of specialists in certain industries, which is an obstacle for their faster development.

Generally, activities dominated by the government were featured by low efficiency and slower development. The private sector was the generator of economic growth. In the second quarter of 2006 the value added increased by 7.3% while for the first half it was 7.9% in real terms. The function of the public sector is to redistribute value created by the private one. Even if one assumes that the public sector creates value according to the NSI data it continued decreasing in real terms.

During the quarter, the fastest growth was realized in manufacturing (9%) which was the reason for the rise of its share in the economy. The development of services was slower (4.7%), while in agriculture there was a slump (-1.1% in real terms). The situation in agriculture during 2005 (decrease of 5.8% in the second quarter) could be attributed to a large extent to the effects of floods but it should be offset in 2006. Problems in agriculture, however, seem to deepen and the EU accession will not resolve them.

Consumption continued its steady growth which is due to the private consumption (real growth of 7.4%) while the collective grew moderately in real terms (1.2%). Investment measured by the gross fixed capital formation kept rising significantly (20% in real terms), which is an indication of higher optimism among investors due to the forthcoming EU membership. Thus the share of investment in GDP climbed to 25%; a feature of fast developing economies.

Growth in investment was combined with the unchanged share of gross saving at about 16% of GDP resulting in higher current account deficit. As far as the share of savings is not raised, external savings should be used in which case the current account deficit would remain.

Generally, data show the positive trend of the Bulgarian economy. The real growth rate is higher than in the older EU member states but the comparison to the fastest developing countries in the EU is not in favor of Bulgaria. During the second quarter of 2006, the real growth of GDP in Lithuania was 8.4%, in Latvia it was 11.1% and in Estonia it was 12.4%. These are the countries whose economic policies are examples of successful reforms leading to the faster increase of incomes. Hence the pattern is clear and it should be applied dependent on the Bulgarian specifics.