On the day of the Lehman brothers bankruptcy the Bulgarian official statistics reported GDP data for Q2 2008. The contrasts between the bad news on the capital markets and the good news of the 7.1% growth shocked the broad audience. What is more, a month ago the NSI forecasted (based on preliminary data) that the real growth for the second quarter is going to be (only) 6.3%.

The reactions had different nuances. Some consider this to be statistically manipulated. Others find this the signal that the Bulgarian economy is going into a recession, but later than the world.

In first place, we must differentiate methodologically between economic growth and asset prices. GDP as an indicator measures the goods and services produced in a country for a given period of time – he so called value added (plus correctives). Asset prices (or the value of property or company stocks) reflect the willingness of savers in particular moment to invest in assets. This willingness is a result of many factors, but after all it could be taken as the confidence that the investment will payback in the future. Hence, the first major difference between GDP and stock exchange indices reflects past events, whereas the value of shares envisages future expectations.

It is probably more important to discuss the suggested direct relation between decline in asset prices and economic growth deceleration. The consensus is that there is a forthcoming global recession, including one in Bulgaria.

We must have in mind that the bankruptcies are a useful mechanism in the market economy, via which losses are personalized. In other words, recently the dominating opinion included uncertainty with regard to the size of potential losses and more importantly – which will have to bear them. The general uncertainty impedes the market in its most important function – to allocate resources toward their most productive use. In this line of thoughts clearing the market from those, destructing capital, is the beginning of the financial system recovery.

For Bulgaria the transfer of effects from the global crisis is already happening on the stock exchange – the holders of shares are attempting to exit the market, even if losing. But the worries are however bigger regarding what might happen to growth and employment.

At first sight the Bulgarian economy is growing exclusively because of the faster growth of investments. This means that decline in investment will lead to growth deceleration. Such a phenomena is already notable in some mature markets. This is most easily presented with possible outflow of housing purchases – which would lead to decline in construction and the related sectors, reduced employment, and therefore lower income and consumption, and so forth on the value added chain.

This scenario is possible in the short term. But in the long term we must note that the relative scarcity of capital in the Bulgarian economy compared to mature markets, which means higher marginal productivity. In other words, the lagging behind of Bulgaria suggests that the potential for ding profitable business is relatively high, as long as the environment, provided by government regulations and court institutions, is favorable. So, it is too early to speak of investment balloon in the Bulgarian economy on a macro scale, which would create stimuli toward steady contraction of the new investment activity. If the business environment continues to improve, the growth could be kept at high levels.

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