site.btaEuropean Commission: Bulgaria's Economic Recovery Postponed

Brussels, November 11 (BTA) - The European Commission has significantly lowered its forecast for Bulgaria's economic growth in 2021 to 3.8 per cent, as shown in the autumn economic forecasts of the institution, published on Thursday. In its July report, the European Commission set a rate of 4.6 per cent for Bulgaria this year.     

The forecast for the growth of the Bulgarian GDP in 2022 remains unchanged at 4.1 per cent, i.e., the pace will accelerate, but for 2023 Brussels expects GDP growth to slow to 3.5 per cent.  

According to the baseline scenario of the Bulgarian National Bank from September, the forecast is that Bulgaria's GDP in real terms will report growth of 3.9 per cent for this year, which will accelerate to 4.7 per cent in 2022, after which it will slow down to 3.8 per cent in 2023.    

Bulgaria's economy shrank by 4.4 per cent in 2020, the EC document points out, adding that the recovery of this country is delayed due to the short-term challenges related to slow vaccination and high energy prices.  

After a rapid recovery 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. Services exports regained some ground but remained well below full capacity. The short-term indicators point to some 40 per cent fewer foreign tourist arrivals during the peak July-August season. Although the accommodation industry partially compensated for the shortfall in foreign demand by attracting domestic visitors, both the number of beds available and the occupancy rate were well below normal levels, the document says.  

On the positive side, private consumption remained robust, underpinned by the expansion of disposable income. Exports of goods recovered swiftly, benefitting from the pick-up in 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, the document says.   

Recent hikes in energy and food prices are set to erode the purchasing power of low-income households. However, increases in social transfers and pensions in the current and next year should offset the effect of higher prices on households' budgets. The expansion of consumer demand is set to continue on the back of a tight labour market, high consumer confidence and strong lending activity. Goods exports are forecast to grow in parallel with external demand, while services exports are projected to recover more gradually, the EC predicts.

The risks to the forecast are tilted to the downside. The new introduction of the COVID-19 certificate may prove insufficient to contain infection rates and adjustment to the new normal may take longer, Brussels warns. In addition, the impact of higher energy prices on headline inflation and consequently on private consumption may be stronger than expected.      

Labour Market Set to Tighten Gradually  

After an initial surge at the onset of the COVID-19 pandemic, the seasonally adjusted unemployment rate has stabilised at around 5.5 per cent since June 2020. In parallel, the labour market participation rate has dropped on average by around 1 ppt since the beginning of the crisis. The government's job retention schemes have played a significant role in minimising job losses by allowing a temporary transition towards short-time work schemes. Over the next two years, the favourable economic outlook is expected to tighten the labour market, with unemployment rates gradually declining to 4.6 per cent in 2022 and 4.4 per cent in 2023. At the same time, the transition back to full-time work and a projected increase in activity rates are forecast to partially alleviate the pressure on the labour market and on wages. Nevertheless, growth of wages is expected to remain strong at 9 per cent in 2022 and 7.9 per cent in 2023, according to the EC forecast.       

Headline Inflation to Accelerate   

Inflation, as measured by the harmonized index of consumer prices, accelerated sharply in the second and third quarters of 2021 on account of higher prices of energy and unprocessed food. The seasonal price increases in tourism services have been less pronounced, which helped contain overall services inflation. Annual inflation is set to accelerate to 2.4 per cent in 2021 and 2.9 per cent in 2022 on the back of high energy prices and their second-round effects. Inflation is then forecast to decelerate to 1.8 per cent in 2023 as these effects are expected to dissipate.  

Fiscal Stimulus Remained Strong    

The general government deficit is projected at 3.6 per cent of GDP in 2021. The improvement from the previous year's deficit of 4 per cent of GDP is mainly due to statistical corrections in 2020 general government accounts, the document points out. 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 per cent of GDP in 2021 and remain around that level thereafter, according to the EC forecast.

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