Bulgaria's economy will register a growth of 1.4% in 2012, according to the February Economic Forecast of the European Commission unveiled Thursday.

Brussels's new growth forecast for Bulgaria is 0.9 pp lower than it was in November 2011; it estimates Bulgaria's 2011 GDP growth at 1.8%, after the 0.2% growth in 2010.

At the end of 2011, Bulgaria's Finance Minister Simeon Djankov announced that the 3.7% economic growth projected in the 2012 State Budget Act was too optimistic and the Bulgarian government lowered its forecast to 2.3.%.

"The Bulgarian economy has revived relatively slowly over 2010-11, with real GDP in the fourth quarter of 2011 still about 3% below its peak value recorded in 2008. The GDP flash estimate for the fourth quarter of 2011 indicates growth of 0.4% q-o-q and 1.5% y-o-y. For 2011 as a whole, annual growth is expected to reach 1.8%," the EC said in its interim economic forecast presented by Economic and Monetary Affairs Commissioner Olli Rehn.

"The growth momentum from 2011 has had a marginally positive carry-over to 2012. As in other EU Member States that are catching up, the growth pattern in the initial recovery has been largely driven by strong exports of both goods and services, while domestic demand has remained stagnant, reflecting a rapid adjustment and an unwinding of imbalances in the private sector. The strong rebound in exports has been levelling off over 2011, and monthly industrial production indicators, as well as industry confidence readings point to markedly lower export growth going forward. Nevertheless, in spite of the weaker outlook in the euro area, Bulgaria is not expected to fall back into a recession," it added.

The EC pointed out that Bulgaria's annual growth has been revised down (by 0.9 pp. less than projected in the autumn forecast) and is now forecast to reach 1.4% in 2012, while Bulgarian GDP growth is expected to remain rather low in the first half of 2012, but to accelerate gradually thereafter in line with economic activity picking up in the EU as a whole.

"Following the rapid rebound in exports over the past two years, domestic demand is expected to pick up with a lag and become a main driver of growth in 2012, especially since domestic economic fundamentals have improved amid the rapid adjustment process," according to Brussels.

The Commission stresses that Bulgaria's private-sector imbalances have unwound very quickly, as indicated by the current account swinging into a surplus, while the ratio of private sector debt to GDP has started to decline and the dependency of the financial sector on external financing is decreasing. In spite of vulnerabilities, the financial sector has remained stable and has provided for modest growth in private sector credit in 2011.

The Bulgarian economy is also said to benefit from relatively strong public finances, which do not face major adjustment needs in the longer term. The gradual revival in private consumption is expected to continue. While economic confidence readings declined over the final quarter of 2011, sentiment recovered in January 2012 and is somewhat stronger than the EU average.

Following a markedly strong and protracted period of labor shedding, the Bulgarian labor market appears to be stabilizing in 2012, Brussels notes, adding that even with weak employment performance, household income has been supported by relatively strong growth in average wages, probably driven by catching-up effects from low levels and structural changes in the labor market.

"Investment is expected to be upheld by public sector projects. After a notably slow start in EU structural funds intake over the previous years, it is planned to increase absorption significantly in 2012. However, this is countered by weak private investment activity, given the relatively high debt stock of the corporate sector, which entails further deleveraging of corporate balance sheets. HICP inflation slowed considerably over the course of 2011 and amounted to 3.4% in 2011 on average, 0.3 pp. less than expected in the autumn forecast. Inflation is expected to moderate to 3% on average in 2012, supporting growth in real purchasing power of consumers," EC concludes.

Accorsding to the Comission, Bulgaria's forecast baseline scenario is subject to significant risks. A prolonged stress in financial markets could further delay the recovery in consumption and investment. Uncertainty regarding the consumption behaviour of households remains one of the major risks to the outlook, both on the upside and on the downside.

"Should households lessen their currently high precautionary savings rate, this could underpin stronger consumption growth," Brussels said.

Full text of the February 2012 EC Interim Economic Forecast is available HERE

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