- Political stability
- Fiscal affairs
- Monetary policy
- Regulated markets
- Privatisation
- Macroeconomic developments
The economy is growing, except for agriculture
submited on 03.01.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 03.01.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
Under the best indicators for the economy in the last at least 100 years, in 2007 international analytical companies started the strongest after 1997 campaign for inducing “worries” about the risks before Bulgaria. Most of them point at the currency board as a factor for potential future risks, without saying what a central bank would do in such a situation. They always speak in unclear conceptions – overheating, external misbalances, exhausted investment potential, but never explain why they think this way and when and how their worries will become reality.
Two indicators in the end of 2007 generally "supported" the cause of the “worried”. About inflation and reasons for higher consumer prices growth we have already written. But when the National Statistical Institute announced deceleration of GDP for Q3 this gave reason for new series of dark forecasts.
For Q3 2007 the value added in the agriculture sector shrank (in real terms) by 43%. In the same time the industry grows at 12.8%, and the service sector – at 11.1%. In total, this results in GDP growth of “barely” 4.5% with rates exceeding 6% in the last several periods. If we look at the entire 9-month period of the year, the deceleration in agriculture is “only” 26.4%, whereas industry and services are growing at 10.5 and 9.7% in real terms.
The “poor” yield by itself gives immediate explanation of the rapid decline in agriculture and therefore – the total growth slowdown. But this is not something new. If we look at the trend from 2001 on, industry and services’ growth gradually accelerates – from a little more than 4% on annual basis to almost 10%. In the same time agriculture registers growth after decline, as slowdowns become larger. Even more notable become the two parallel economies – the dynamic, globalizing and attracting investments and the stagnating, almost entirely dependent on the state and “locked up” labor. The second seems doomed to decline, whereas the first will begin to grow at two-digit rates.
The question with estimation in agriculture remains. In our opinion it is hard and therefore it should be used carefully when estimating the overall state of the economy. Thus for example Industry Watch labor analyses do not include the employment in the farm sector. Another factor is the environment distorting subsidizing policy, conducted on a national, as well as European level. This way the sector could be followed in order to obtain an estimation of the rationale and mistakes in government policy, rather than the importance to the general economic dynamics.
The data shows something else as well – namely that growth is not induced by consumption, as it is recently often stated. If we check the last 3 years only, the share of consumption in GDP declines at the expense of investments. The accumulation of capital is growing at record pace, as in the nine months of 2007 it is 25.9% relative to 2006. We must also take into account that internal savings also grow, i.e. investments, financed by local savings, are increasing together with foreign investments.
However, risks exist – but they can be to a large extent avoided, if they are understood and realized. In first place – is “overheating” possible? “Overheating” is the easiest to use, but also the most difficult to define potential risk before an economy. It is usually supposed that when something is growing “too” fast – but remains to define the limit for each economy.
In Bulgaria we should pay more attention to the limitations of two important growth factors – human capital and physical infrastructure. In Sofia and Varna there is no unemployment officially (almost), and for the country the level declined to below 7%. In less than 2 years working places have increased by 250 thousand. This however means that the “available” human resource is to a large extent occupied, and the rest are people close to pension age or with total lack of skills and literacy. Whereas free land is still available (for now), people capable of working begin to diminish. The next year will probably be the first, in which the lack of labor force will outweigh unemployment as publicly perceived problem.
The lack of physical capital can be easily seen in biggest cities; traffic jams and the slower execution of construction works by the preoccupied entrepreneurs. However, this shows that a place for investments is present – and probably large part of them will continue to boost productivity.
It remains to be seen up to what levels the asset price growth will continue – financial (i.e. stocks), and real (i.e. real estate). If there is a “balloon” – and in some segments there most likely is, the “correction” to the long-term equilibrium values will pass through investment withdrawals. Even if this is the case, the capital is always allocated where conditions for doing business are best, and they depend on government policies as well.
Two indicators in the end of 2007 generally "supported" the cause of the “worried”. About inflation and reasons for higher consumer prices growth we have already written. But when the National Statistical Institute announced deceleration of GDP for Q3 this gave reason for new series of dark forecasts.
For Q3 2007 the value added in the agriculture sector shrank (in real terms) by 43%. In the same time the industry grows at 12.8%, and the service sector – at 11.1%. In total, this results in GDP growth of “barely” 4.5% with rates exceeding 6% in the last several periods. If we look at the entire 9-month period of the year, the deceleration in agriculture is “only” 26.4%, whereas industry and services are growing at 10.5 and 9.7% in real terms.
The “poor” yield by itself gives immediate explanation of the rapid decline in agriculture and therefore – the total growth slowdown. But this is not something new. If we look at the trend from 2001 on, industry and services’ growth gradually accelerates – from a little more than 4% on annual basis to almost 10%. In the same time agriculture registers growth after decline, as slowdowns become larger. Even more notable become the two parallel economies – the dynamic, globalizing and attracting investments and the stagnating, almost entirely dependent on the state and “locked up” labor. The second seems doomed to decline, whereas the first will begin to grow at two-digit rates.
The question with estimation in agriculture remains. In our opinion it is hard and therefore it should be used carefully when estimating the overall state of the economy. Thus for example Industry Watch labor analyses do not include the employment in the farm sector. Another factor is the environment distorting subsidizing policy, conducted on a national, as well as European level. This way the sector could be followed in order to obtain an estimation of the rationale and mistakes in government policy, rather than the importance to the general economic dynamics.
The data shows something else as well – namely that growth is not induced by consumption, as it is recently often stated. If we check the last 3 years only, the share of consumption in GDP declines at the expense of investments. The accumulation of capital is growing at record pace, as in the nine months of 2007 it is 25.9% relative to 2006. We must also take into account that internal savings also grow, i.e. investments, financed by local savings, are increasing together with foreign investments.
However, risks exist – but they can be to a large extent avoided, if they are understood and realized. In first place – is “overheating” possible? “Overheating” is the easiest to use, but also the most difficult to define potential risk before an economy. It is usually supposed that when something is growing “too” fast – but remains to define the limit for each economy.
In Bulgaria we should pay more attention to the limitations of two important growth factors – human capital and physical infrastructure. In Sofia and Varna there is no unemployment officially (almost), and for the country the level declined to below 7%. In less than 2 years working places have increased by 250 thousand. This however means that the “available” human resource is to a large extent occupied, and the rest are people close to pension age or with total lack of skills and literacy. Whereas free land is still available (for now), people capable of working begin to diminish. The next year will probably be the first, in which the lack of labor force will outweigh unemployment as publicly perceived problem.
The lack of physical capital can be easily seen in biggest cities; traffic jams and the slower execution of construction works by the preoccupied entrepreneurs. However, this shows that a place for investments is present – and probably large part of them will continue to boost productivity.
It remains to be seen up to what levels the asset price growth will continue – financial (i.e. stocks), and real (i.e. real estate). If there is a “balloon” – and in some segments there most likely is, the “correction” to the long-term equilibrium values will pass through investment withdrawals. Even if this is the case, the capital is always allocated where conditions for doing business are best, and they depend on government policies as well.
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