2024-08-20 07:14:27
Credit inflates consumption, but a rate hike will cool everything down
In the first quarter of 2024, Bulgaria turned out to be the sixth in the European Union with the highest economic growth, and the data released a few days ago for the second quarter even put it in fifth place with its 2% GDP growth on an annual basis (See the infographic).
But as macroeconomist Georgi Ganev expressed to “24 Chasa”, “there is no cause for great joy, because it is more important for us that the large economies of Western Europe are doing well.” And precisely they do not show any signs of exiting the recession, or at least of overcoming the low and even negative growth rates.
The largest economy in the EU – Germany, for example
still unable to recover from the recession
And in the second quarter, it has not been able to get out of the negative economic growth and shows a 0.1% decline in the gross domestic product, and this continues for the fourth consecutive quarter.
The second largest economy, France, has somewhat emerged from recession and has a regional average growth of 0.3%, which is quite low.
The surprise comes partly from the fact that the economies of southern member states such as Spain, Portugal, Greece and to some extent Italy are showing promising signs of growth.
Austria, technically speaking, is also in recession because it saw zero economic growth in the second quarter, and Sweden saw a 0.8% decline.
From the northern countries
only the data for Ireland are for 1.1% growth,
but they are widely assumed to be distorted by the concentration there of the European branches of multinational companies.
So far, there are rather individual reasons for what is happening for each of the leading economies in the European Union, from which it is difficult to assemble a general explanation.
“There are structural reasons in Britain and the most important of them is that
there they are currently consuming the effects of Brexit
It’s just that the decreased trade with the rest of the countries in Europe affects them to a great extent, and there’s no reason to lie, but Brexit turned out to be harmful for the rest of the EU members as well,” Ganev said.
In France, according to him, there are certain accumulations that the pandemic and the war in Ukraine have only strengthened as trends. The fact that in French society at the moment
it is difficult to carry out any reforms,
only aggravates the situation.
What we should fear the most, however, are the economies of our biggest partners – Germany and Turkey.
There is no problem with economic growth in Turkey – in the first quarter it was 7.4%. But to a large extent it is due to the abnormally high inflation in our southern neighbor. In July, it was 61% year-on-year, and even that is considered a drop from the nearly 100% it reached over the past year and a half.
Fears for Germany stem from the fact that
it is our largest foreign trade partner
and at the same time among the biggest investors in Bulgaria.
A week ago, for example, it became clear that the German company Leoni will close its automotive cable factory in Pleven, which is the largest employer in the entire region, by the end of the year.
The reasons have nothing to do with the local economy. It is about optimizing the entire production of the German group due to the difficulties of the German car industry, which will lead to the closure of its factories in other countries as well.
But 1,300 people remain unemployed in Pleven, which is quite a shock for the local labor market.
According to Georgi Ganev, the difficulties of the German economy increasingly look like structural difficulties. He drew attention to the fact that the country’s poor economic indicators
have already appeared on the eve of the pandemic,
it’s just that everything that happened afterwards in Europe and the world prevented us from seeing the trends clearly.
“Remember that Germany had become too dependent on Russian energy sources and for them the interruption of supplies is a much bigger shock than for us,” he said.
The German auto industry, for example, faces additional difficulties as it must make the transition from internal combustion engines to electric car production just as China is poised to flood the world with its subsidized electric cars.
Industrial giants such as BASF, Mercedes-Benz Group and Volkswagen announced weaker-than-expected forecasts last quarter. A further rise in inflation, if it happens, could make the situation even worse.
There is, of course, a somewhat universal explanation for what is happening with the European economies, and in particular with the Bulgarian one. And this is the banks’ monetary policy.
According to Ganev, the outflow of liquidity to the market for many years
has led to a waste of capital at the expense of consumption
and perhaps the time has come for it to be returned to us.
Currently unemployment is low, Europeans have jobs. Lower energy prices boosted their purchasing power. At the same time, however, productivity, as measured by GDP per worker, has declined compared to 2022. If it does not start to rise, Europe is likely to fall behind the US, and it is no coincidence that the IMF predicts that European GDP per person will fall from 68% of American in 2019 to 66% in 2029.
The European Central Bank has somewhat managed to fight inflation by raising interest rates, but it is currently at a crossroads. It has already started lowering interest rates, in June, for example, the base rate was reduced by 25 points to 3.75%, but it is not at all certain whether at its meeting on September 12 it will make another reduction, as the market expects.
That would boost economic growth, but too much policy easing could reignite inflation, which is still lingering.
Macroeconomist Lachezar Bogdanov claims that in Bulgaria, low unemployment and the increase in wages are somewhat objective factors, but the credit expansion is too great and affects the market demand by inflating it. This is where the growth of the economy comes from, but according to Bogdanov, even a slight cooling of lending could have adverse consequences.