Spurred by synchronized recoveries in consumption and investment, the economy expanded by 3.4% yoy in 2Q18, a tad weaker than both the 3.7% average reported during the preceding four quarters and our call for 3.8% real GDP growth. On the positive side, the composition of GDP growth continued shifting from consumption to investment, which is a welcome transformation that will make the ongoing expansion more balanced and lasting, if policy makers are successful in preventing another unsustainable increase in real estate prices.
The recent weakness of the Turkish economy has spurred contagion concerns. Indeed, Bulgaria looks vulnerable, with slightly less than 8% of last year’s goods exports going to Turkey. The decline was already visible in the first seven months so far this year when exports to Turkey dropped a hefty 25.4% yoy. Our baseline macro scenario for Turkey envisages that this trend will persist in the rest of 2018 and 2019, before reversing in 2020 when growth is expected to rebound. Apart from the negative effect via the trade channel, the fallout from Turkish problems should be limited, as Bulgaria’s vulnerability indicators are at very comfortable levels, which should limit spillover via financial and any other contagion channel. Nevertheless, the size of the export contraction will be strong enough to trigger a slight downward revision to our growth projection for this year to 3.8% (from previously 4.0%).