Households have replaced export as the sector contributing most to economic recovery

At least three more years will be needed before the rates of economic growth can reach between 4 and 4.5% p.a. This is what Christophor Pavlov, chief economist of UniCredit Bulbank, said during Next Year’s Business Plan Conference hosted by Capital Daily. According to him this is where long-term potential for economic growth will be seen.

GDP growth is to accelerate to 1.7% in 2013, compared to the expected growth for this year of 0.7%, UniCredit Bulbank forecasts point out. The chief economist of the bank is convinced that the recovery process will continue to gain momentum in 2013 as well.

Unlike the last three years when it was mainly export to support economic recovery, now households have turned into the sector with the major contribution.

“Households, postponing purchases in the last four years, have started to increase their consumer spending”, Christophor Pavlov said. Analyses show that bad loans of households have already reached their peak. At the same time the stabilization of housing prices is expected to bring about a growth in lending.

Christophor Pavlov explained that the recovery of employment rates will take more time, perhaps another two or three years, or even more. He expressed concerns that unsolved remain some deeply rooted problems such as youth unemployment, unemployment among people aged over 54, and the high rate of discouraged workers.

Individual consumption in 2013 will grow by a little less than 3%. This will add 2 percentage points to the growth of GDP. It will be supported, among other factors, by the increase of the minimum salary and pension rates.

Compared to households, the corporate sector is recovering more slowly. The main reason behind this is the unsustainably high levels of debt in some sectors of the economy from the years of the biggest economic growth.

Since the beginning of the crisis, capital expenses of private companies have decreased by almost one half compared to their peak levels seen during the boom. At the same time, a not small portion of the existing productive capital went out of use due to the obsolescence and wear and tear of the existing property, plant and equipment.

“This undermines production capacity and eventually, despite the drop in demand, at some point will logically lead to shortage of production capacity”, Christophor Pavlov further said. According to him, although slowly, the private sector will start to increase its capital expenses in certain sectors.

Thus after the drop witnessed for three consecutive years since the beginning of the crisis and the always clearer stabilization signs seen in the course of this year, the gross formation of share capital is expected to grow in real terms by about 3% in 2013, adding about 0.6 percentage points to economic growth. An important contribution to this will be given by the continued improvement of utilization of funds from the European Union.

With respect to the debt crisis in Europe, we can see a process of shifting of focus from Greece to other Eurozone countries. This is mitigating the tension on financial markets, and the risk-taking appetite to all Balkan countries is growing. As a result, the region is seeing an increase in incoming capital flows.

Capital flows channeled through the bank sector are expected to reverse their direction end of 2013, after being negative for the past nearly four years. According to UniCredit Bulbank’s economic team, next year the access to new loans will be easier, and debt-burdened companies will find it easier to renegotiate their liabilities.

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