Where to Look for Early Signs?

While Hungary, Iceland, Pakistan and Ukraine are now officially "in crisis," a number of other governments have done their best to show the crisis will not influence their economies much. One such country is Bulgaria. In an earlier blog, I predicted a significant slowdown in the economy next year: to 2.5-3 percent growth. This is about 1.5 percent below the current government forecast.

There are reasons for some optimism, as detailed in another recent blog. Most of all, the government finances are in great shape. Still, where to look for the coming troubles? Here are four leading indicators to watch:

1. Activity and daily wages in the construction sector. Construction activity is the first to show decline when the economy shrinks. Projects can be frozen for some time, without significant loss in value. This is what happened in the 1997 financial crisis, and may happen now. Signs are already worrying. Daily wages have reportedly fallen 30-40 percent, and several large projects (for example, the mini-cities projects in Sofia by the Lithuanian VP Group and the Spanish Riofiso group - each at over one billion lev) have seized operations.

2. New job postings. The first response of employers is to curtail new hirings, while waiting for more information on where the economy is going. One of the largest job sites in Bulgaria -- jobs.bg -- saw an 8% decline in postings between September and October (from 41,000 postings to 38,000). The other big site -- JobTiger.bg -- saw a nearly 20% drop in job postings in October 2008 relative to the same month the previous year.

3. Trade statistics. Export and import statistics -- especially in this type of financial crisis that started in rich countries -- are likely to be a good barometer for how hard the crisis is going to hit the manufacturing sector. The first such statistics for September/October will become available later this month. I would study them in great detail. Some exports are already hit hard: the copper producer "Asarel Medet" has seen a collapse in export orders, as have fellow producers in Chile and other countries.

4. Real estate prices. These are in some countries like Kazakhstan and the US a cause for the crisis. In other countries, they will fall as the economy slumps. With industrial activity down, fewer people move to new jobs and locations, hence the demand is lower. Also, less money to buy large items and anyway the banks will be less willing to support mortgages.

I would argue that these indicators are better signs of the economic trouble to come than stock market prices, which may be driven by large foreign inflows, or investment flows, which may in some sectors be irreversible for some time (if you have almost finished a project, you will probably finish it).