In the context of the dynamic economic changes that are sweeping the global market, the question of the future of the economy in 2024 is becoming increasingly relevant. Despite the presence of several stable indicators, there remain a number of unknowns that could have a direct impact on economic development. What lies ahead in the next calendar year 2024 and what are the forecasts for the economic situation of the country - these and other questions on the topic we invited Daniel Vasilev, Tavex's Chief Economist for South East Europe to comment.
What are your economic forecasts for 2024?
Daniel: It grew by 3.4% in 2022 and the current forecast is for more than double that rate of growth. Even these may turn out to be overstated.
I base this on two trends. First, when central banks start raising interest rates after periods of low-interest rates, economies fall into recession. The European Central Bank has maintained the lowest rates in history for almost a decade. Since July 2022, it has reversed its policy and we are seeing the fastest rise since the central bank was created. That is why Germany, which is the largest economy in the EU, has been in recession for the last three quarters, and the Bundesbank expects a fall in the July-September period. The eurozone itself is heading for stagflation, with very slow growth and a consumer price index that is more than twice the ECB's target.
The countries of the Old Continent are our main trading partners. A continued slowdown or contraction in them, even all other things being equal, will affect Bulgaria's output and trade. A similar trend is already observed in some data. As of August this year, our exports had shrunk to just over BGN 6 billion, according to Tradingeconomics. This is the lowest level since the end of 2021 and represents a decline of more than 25% from last summer's peak.
Second, business lending in this country has started to get more expensive. Again in August this year, the average interest rate on new loans in BGN was 4.04%, up from 2.49% a year earlier, according to the BNB. It is close to the average for the past ten years. But future growth, especially in the face of falling consumption, will weigh on business activity.
In the last business cycle, the European Central Bank started to increase the base rate in early 2006. Half a year later, this started to have an impact on new consumer lending in Bulgaria. Today, the base rate in the euro area is already significantly higher than the interest rate in the country. Of course, the latter also depends on factors other than the euro area prime rate. But interest rates are unlikely to remain at record lows forever, given the conjuncture in Europe. Their growth will affect consumption, especially with the already very high prices of goods and services, and it will affect the economy as a whole. I expect consumer durables to be the hardest hit, because their demand is, as a rule, to no small extent dependent on financing conditions.
Chart 1: Base rate in Europe and interest rate on housing loans in Bulgaria (Sources: ECB, BNB)
How might these forecasts affect employers and employees?
Daniel: If my expectations come true, the labour market in our country is likely to cool down next year as the jobless rate hits a record low of 4% at the end of 2022. At such a low rate, it is difficult for the economy to grow organically for a long period of time, as an "overheated" labor market and rising (at least nominal) wages begin to act as a brake on the creation of new projects, even when labor productivity increases, as is the case here. Another break is administrative measures such as the increase in the minimum wage and social security contributions. These make it difficult to adjust the labour market, especially during and after an economic slowdown.
Chart 2: Unemployment rate in Bulgaria (Source: Eurostat)
Unemployment has now returned to growth since early 2023 for the first time since the pandemic. It remains to be seen whether the rate of change will accelerate.
What can businesses do?
Daniel: Even if we face an economic slowdown or recession, it is not "the end of the world." In such a situation, a major cause of business problems, apart from a fall in demand, is usually a high level of debt. Given this, it is prudent to diversify customers, reduce debt (or eliminate it altogether), and build cash reserves. Investments in human capital and marketing, which often shrink in difficult times, are key to survival and growth. In a recession, many asset prices fall. So let us not forget that it can also create many business opportunities.
