EC: Bulgaria's Economic Growth Accelerates, but Downside Risks Remain
European Commission's Spring 2014 forecast.
The economic recovery in Bulgaria is expected to firm in 2014 and 2015 as domestic demand gradually strengthens.
After a deflationary period in 2014, inflation is projected to gradually pick up in 2015. Following a fiscal stimulus in 2013, the fiscal stance is forecast to remain expansionary in 2014 before turning marginally contractionary in 2015.
Bulgaria’s economy expanded by 0.9% in 2013 while GDP growth for 2012 was revised marginally down to 0.6%. Thus, the economy continues to operate well below its potential.
Private consumption and investment contracted last year, while exports and public expenditure supported the modest economic growth. Growth is projected to broaden and increase gradually to 1.7% in 2014 and 2.0% in 2015, as domestic demand is forecast to recover and complement exports, which have been the main driver of growth thus far.
Rising consumer confidence has yet to translate into higher household consumption. In fact, private consumption contracted by around 2% in 2013, despite the increased purchasing power of households following an increase in pensions by over 9% in April 2013 and the stable growth of real wages amid low inflation. Recent monthly retail data, however, suggest that private consumption should stage a gradual recovery in 2014 and 2015. After contracting last year, overall investment this year and next is set to resume growth driven by both public and private investment, thanks in part to accelerated absorption of EU funds. Investment growth should be accommodated by the relative strength of the financial sector, which has been accumulating liquidity on the back of increases in domestic deposits over the last couple of years. Also, interest rates on both new loans and deposits have been declining, implying an improvement in lending conditions and credit availability.
Exports are set to continue growing at a moderate pace in 2014 and 2015, sustained by the recovery of the EU as a whole. Modest gains in market shares are also expected to continue. Nevertheless, the contribution of net exports to overall economic growth is projected to turn slightly negative in 2014, as the recovery in domestic demand causes imports to rise.
The current-account balance reached a surplus of about 2% of GDP in 2013 and, while expected to remain positive, is set to decline gradually towards balance by 2015.
Risks to this macroeconomic forecast seem tilted to the downside. Most significantly, the country's energy dependence on Russian gas imports could become a burden to growth in case of supply disruptions. Also, the expected recovery in private consumption could prove weaker than expected, given that the Bulgarian labour market is still fragile.
After four years of adverse labour market trends, unemployment appears to have peaked in 2013 at about 13% of the working age population. Employment still contracted in 2013, but this was partly driven by strong decline in the working age population, due to negative demographic trends. While the manufacturing and construction sectors continued to shed labour, overall labour market outcomes in 2013 were supported by a good harvest which boosted employment in the agricultural sector. In 2014 and 2015, the labour market is expected to stabilise further but remain weak overall. Unemployment is projected to decline only marginally to 12.5% in 2015 since many of the unemployed have difficulties re-entering the labor market.
The inflation rate turned negative since summer 2013, reflecting specific domestic and international factors and cautious consumer behaviour in spite of rising real purchasing power. Import prices have fallen significantly over 2013, reflecting lower global energy and food prices, as well as the appreciation of Bulgaria's euro-fixed currency against its main trading partners in the Balkans. An exceptionally good harvest in 2013 also reduced food prices. The government lowered some administratively set prices (most notably electricity charges), which lowered HICP in 2013 by about 0.3 pp. in total, but more strongly since second half of the year. The latest cut to electricity price was made in early 2014, with an estimated impact on HICP of about 0.3 pp. Inflation is forecast to gradually return to positive territory towards the end of 2014, as the base effects from the administrative prices and previous years' exceptionally good harvest fade and in line with the expected pick up in domestic demand. HICP inflation is expected to average -0.8% in 2014 and to rebound to 1.2% in 2015. A scheduled increase in tobacco excise in 2015 is estimated to contribute to inflation by about 0.2 pp.
Following three years of consolidation, the general government deficit is estimated to have increased from 0.8% of GDP in 2012 to 1.5% in 2013 and is projected to increase further to 1.9% in 2014. This is driven by a soft patch in economic recovery in 2013 and additional discretionary spending over 2013 and 2014 for social expenditure (including the increase in pensions), various current expenditure items and public investment. The general government deficit is set to improve slightly to 1.8% of GDP in 2015, in line with the pick-up in economic activity, assuming no change in policy. In structural terms, the deficit is estimated to have deteriorated by over ½ pp. of GDP in 2013 and by a further ½ pp. in 2014, but to improve by about ¼ pp. in 2015. The general government gross debt is forecast to increase from 18.9% of GDP in 2013 to about 23% in 2015. The debt ratio fluctuates slightly over the forecast period, reflecting a planned refinancing operation of one large bond maturing in early 2015.