site.bta Bulgaria in EU Autumn Forecast 2014: Subdued Growth Amid Rising Uncertainty

Bulgaria in EU Autumn Forecast 2014: Subdued Growth Amid Rising Uncertainty

Brussels, November 4 (BTA) - In its Autumn Foreast for 2014, the
European Commission has brought down its real GDP growth
projections for Bulgaria to 1.2 per cent in 2014, 0.6 per cent
in 2015 and 1 per cent in 2016 as domestic demand weakens. In
the spring forecast, the economy was expected to grow by 1.7 per
cent this year and as much as 2 per cent next year.

The document says that after a deflationary period in 2014,
inflation is set to only slowly pick up to 0.4 per cent in 2015
and 1 per cent by 2016. Following a sizeable fiscal
deterioration in 2014, the general government deficit is
projected to remain above 3 per cent of GDP over the forecast
horizon, the document says.

Downside risks have materialised since the spring forecast. A
less dynamic external environment is weighing on exports. In
June, confidence in the domestic segment of the banking sector
received a setback, when a bank run led to the fourth largest
bank, Corporate Commercial Bank, closing leaving no access to
deposits for at least five months. Irregularities in banking
practices have also surfaced. This forecast assumes an orderly
unfolding of the banking situation, with domestic banks
considerably tightening credit standards, thereby depressing
investment by firms, the report says.

Private consumption was supported in the first half of 2014 by
the sharp increase in households' real disposable income driven
by high dynamics of public sector wages and pensions as well as
deflation, the EC analysts further say. Recent monthly consumer
confidence and retail data, however, suggest that private
consumption will lose momentum by 2015. Similarly, gross fixed
capital formation is mainly driven by buoyant government
investment spending on the back of accelerated absorption of EU
funds in 2014.

However, as the current programming period is coming to an end,
EU funded investment is set to decline significantly in the
coming years. In turn, private investment is seen to contract
further in 2014-15, mirroring the on-going deleveraging process
in the economy and low profit expectations amid increased
uncertainty. Overall, investment is projected to decline in both
2015 and 2016.

Despite a slowdown in the first half of 2014, exports are set to
resume growing at a moderate pace in 2015-16, sustained by the
mild recovery in both the EU and non-EU trade partners.

Manufacturing and construction continued to shed labour, but the
overall labour market outcome in 2014 is supported by temporary
employment in the volatile agricultural sector. Slow economic
growth is set to result in small declines in employment over
2014-15, followed by only modest gains in 2016. Nevertheless,
combined with a continued decline in the labour force due to
negative demographic trends, this brings the unemployment rate
from a peak of 13 per cent in 2013 to 11 per cent by 2016.

The EC analysts believe that risks still appear tilted to the
downside. On the domestic front, accelerating confidence
deterioration in the banking sector and a more protracted period
of disruptions to credit intermediation alongside tighter
credit conditions pose considerable risks. A more prolonged
weakness of business and consumer confidence together with the
still fragile labour market could lead to a reduction of
domestic demand further eroding confidence in the economy.

On the external front, the country's dependence on Russian gas
imports could become a further burden to growth should supplies
be disrupted, the forecast says.