(C) Economy in the shade of recession

World & US

The two major engines of the world economy are the USA and China. We should expect the first sings of recovery for the European economies from overseas. Despite the slight recovery of the consumer price index in the US since March 2009, it stays within the critical 50 range and even worsens in October. The producer prices also demonstrate uncertain direction. The main contributor to the PPI in Q2 and Q3 of 2009 are the energy resources. Considering the seasonality of the energy products, their rising demand and prices should not be taken as a serious signal for economy recovery, at lease at this stage.

The US expansionary monetary policy, aimed at economy restart, leads to serious dollar depreciation. I start to feel that the inflated into the banking system money has gained critical mass and is about to burst back into the economy through production and consumption. The continuous US sales tax decline, though hints at little backing from the consumption … yet. Additionally, the low levels of savings would barely influence the GDP growth, so no much support from that side is expected, as well. The two significant, outstanding questions for the US economy recovery remain the unemployment rate and the ability of the Fed to counter potential inflationary pressure.

Europe

The above discussion most probably suggests a continuing euro appreciation, which in turn will make the EU exports less price competitive. Furthermore, under the overreaction of the European financial regulators, huge amounts of liquidity remains clogged into the financial institutions. The relatively higher savings rate in Europe, presumes higher spending, however, the recession fears still refrain the consumers to spend. As long as the bank financing does not resume, I would not expect neither the investments, nor the consumption in Europe to restart the European economy engine. The September industrial production data for Europe is more of a blast from the bottom after protracted submersion, rather than significant indication of recovery. To sum up - before the second half of 2010 it would be premature to talk about the recovery of the European economy.

Bulgaria

Amid the absence of independent monetary policy in Bulgaria, the growth in the economy remains significantly dependent on foreign direct investment (FDI). The FDI data for the latest quarter are not encouraging at all. The government is quite limited in encouraging expansion through fiscal measures, considering the budget havoc and the reduced opportunities for debt issuance. Moreover, this is hardly a way to wake an economy, with inherent inefficient bureaucracy. The lack of a competitive economy and added value through human resources makes Bulgarian exports uncompetitive, especially with the expensive euro, to which the lev is tied. The two factors that have previously supported the country's GDP had shrunk under the influence of drastically limited incoming capital flows and the growth of savings, which has reached its limits. The most plausible winch to pull the sinking cart out of the recessionary quagmire remains the foreign investments.

Attracting direct investments depends both on the economy cycle and policy led by the Bulgarian government and central bank. If the foreign investors give credit to the policy of the GERB government and the mother banks, rather than withdraw from, inject resources to their local branches, it is likely that by the end of 2010 we shall have witnessed the revival of the Bulgarian economy.

However, we should take into account the significant delay in the reflection of economic cycles in developing economies, compared to developed ones with approximate lag range of six to eighteen months. This in turn means that if the developed economies are up and running at the end of 2010, it is more likely that our economy may wake up after one more winter hibernation.