European Commission: Bulgaria's economic recovery postponed

The European Commission has significantly lowered its forecast for Bulgaria's economic growth for 2021 to 3.8%. This is indicated by the autumn economic forecasts of the institution, published today, November 11. In its July report, the EC set a rate of 4.6% for Bulgaria this year.

The estimate for the growth of Bulgarian GDP in 2022 still remains unchanged at 4.1%, ie. the pace will accelerate, but for 2023 Brussels expects growth to slow to 3.5%.

Bulgaria’s economy shrank by 4.4% in 2020, the EC document recalls, pointing out that the recovery of Bulgaria is delayed due to short-term challenges related to the low level of vaccination and high prices of energy.

After a swift rebound in the third quarter of last year, the country's real GDP remained roughly unchanged until mid-2021. Investment activity continued to stagnate in the first half of 2021, limited by still high uncertainty.

Exports of services strengthened somewhat, but remained well below full capacity. Short-term indicators show about 40% fewer foreign tourist arrivals during the peak July-August season. Although the accommodation industry partially offset the shortfall of foreign demand by attracting domestic visitors, both the number of beds available and the occupancy rate were well below normal levels, the report says.

On the positive side, private consumption remained robust, underpinned by the expansion of disposable income. Exports of goods recovered swiftly, benefitting from the growing external demand. Following the supportive fiscal policy of 2020, government consumption continued to contribute to aggregate demand in the first half of 2021.

In response to the rise in coronavirus cases, the COVID-19 certificate was introduced for visitors and workers in public places as of 21 October 2021. Given the low vaccination rates in the country, these restrictions are set to weigh on private consumption for several months, until smooth operation of the new regime and higher vaccination rates are achieved.

Rising electricity and food prices will undermine the purchasing power of low-income households, the European Commission warns. However, the increase in social transfers and pensions this year and next should offset the effect of higher prices on household budgets. The strengthening of consumer demand is expected to continue against the background of the tight labour market, high consumer confidence and strong credit activity. Exports of goods will grow in parallel with external demand, while for services the recovery will be more gradual, the EC predicts.

There is a risk of a downward revision of the forecast, given that the introduction of the COVID-19 certificate may not be enough to limit the levels of infection and it may take longer to adapt to the new norm, Brussels warns.

In addition, the impact of higher energy prices on headline inflation and therefore on private consumption may be stronger than expected.

Labour market set to tighten gradually

After an initial rise at the beginning of the COVID-19 pandemic, the seasonally adjusted unemployment rate in Bulgaria has stabilized at around 5.5% since June 2020, the Commission found. In parallel, the labour market participation rate has fallen by an average of about 1 percentage point since the beginning of the crisis. Government job retention schemes have played a significant role in minimizing job losses, allowing for a temporary transition to short-term job schemes. Over the next two years, the favourable economic outlook is expected to tighten the labour market, with the unemployment rate gradually falling to 4.6% in 2022 and 4.4% in 2023. At the same time, the return to full-time work and the projected increase in activity will partially alleviate the pressure on the labour market and on wages. Wage growth is expected to remain strong - 9% next year and 7.9% in 2023.

Headline inflation to ccelerate

Inflation, as measured by the harmonized index of consumer prices, accelerated sharply in the second and third quarters of 2021 due to higher energy and unprocessed food prices. The seasonal rise in the price of tourist services was less pronounced, which helped to limit the general inflation of services. Annual inflation in Bulgaria is expected to accelerate to 2.4% in 2021 and 2.9% in 2022 against the background of high energy prices and their secondary effects. After that, inflation will slow to 1.8 percent in 2023, as these effects are expected to disappear.

Fiscal stimulus remained strong

The general government deficit is projected at 3.6% of GDP in 2021. The improvement from the previous year's deficit of 4% of GDP is mainly due to statistical corrections in 2020 general government accounts, the document says.

The fiscal stimulus has remained robust in 2021, as the government extended the emergency support to households, businesses and the health sector, and put in place new measures to support vulnerable groups.

However, a recovery in tax revenues is set to offsets the impact on the deficit of still strong expenditure growth. The deficit is forecast to decrease in 2022 as most of the emergency measures are set to discontinue and larger receipts from the EU, including the RRF, are planned to finance most of the forecast increase in public investment. General government debt is expected to be around 26.7% of GDP in 2021 and remain around that level thereafter, according to the EC forecast.

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