The Bulgarian economy expanded by 4.2 percent in 2021, and remained quite resilient in the first half of 2022 with growth of 4.5 percent year-on-year, driven by strong accumulation of inventories, private and government consumption. Private consumption also expanded by 4.2 percent year-on-year in the same period, but momentum has declined amid rising inflation and decreasing consumer confidence. Investment declined sharply in the second quarter, as firms confront increased uncertainty, and was 14 percent below pre-pandemic levels.

Nevertheless, industrial production increased by almost 17 percent year-on-year in the first half of 2022, as manufacturing remained resilient in spite of the Russian gas shutdown since April 2022. Inflation has significantly worsened, reaching 17.3 percent in July 2022, and above 20 percent for food, utilities and housing, transport and restaurants and hotel prices. The government's main measure against rising energy costs is full compensation of firms' electricity bills above €125/MWh.

Households have been protected by means of regulated prices, and pensions were increased by 10 percent in July 2022.

The ongoing political crisis may cause delays in the absorption of the second disbursement of the EU's Recovery and Resilience Facility. Due to the robust performance in the first half of the year, GDP growth has been revised up for 2022 to 3 percent, but uncertainty over gas supply, weakening domestic and foreign demand amid high inflation and deterioration of confidence, as well as political uncertainty, could translate into modest growth of 1.5 percent in 2023.

Reduced gas supplies and inflation to slow growth further in EBRD regions

Bank projects growth of 2.3 percent in 2022 and 3 percent in 2023

• Growth forecast for 2023 revised down 1.7 per cent from May
• Gas prices in Europe averaging around 2.5 times 2021 levels
• Inflation in the EBRD regions reached 16.5 per cent in July

Reduced supplies of gas from Russia and mounting inflation worldwide will slow economic growth further next year in the regions where the European Bank for Reconstruction and Development (EBRD) works, the Bank forecast today.

The projections, contained in the EBRD's latest Regional Economic Prospects report, are subject to major downside risk should Russia's war on Ukraine escalate or the volume of its gas exports decline even more.

The Bank now forecasts gross domestic product (GDP) growth across its regions of 3 percent in 2023, a downward revision of 1.7 percent from its most recent report in May.

However, an upward revision to predicted growth this year is likely to deliver a gentler slowdown in real terms, with output next year a mere 0.5 percent lower than forecast earlier this summer.

Output in the EBRD regions is now expected to grow by 2.3 percent in 2022 after consumers in emerging Europe went on a post-pandemic spending spree in the first half of the year. 

This temporarily boosted consumption, despite a fall in real wages, and led to a sharp widening of current-account deficits across central Europe.

EBRD Chief Economist Beata Javorcik said: "These are very worrying times for the EBRD regions and many advanced economies. As we head towards winter, the economic cost of Russia's war against Ukraine is growing clearer with every day that passes.

"Inflation may not have peaked in the EBRD regions as in many countries the increase in producer costs and high natural gas prices have not yet been fully reflected in consumer prices."

The new Regional Economic Prospects report, entitled A cold winter ahead?, paints a stark portrait of the impact of the war on the EBRD regions' energy markets, inflation and economies.

Since late February, gas prices in Europe have averaged around 2.5 times their 2021 level (in inflation-adjusted terms).

For many countries in the EBRD regions, higher gas prices imply increases in gas import bills equivalent to as much as 4-5 percent of GDP, as economies are highly dependent on gas in their energy mix.

Gas accounts for the bulk of derived heat production in the EBRD regions. In some economies, gas is also an important source of electricity production. Even where electricity is not derived directly from gas, electricity and gas prices tend to move in parallel.

Average inflation in the EBRD regions reached 16.5 percent in July, a level last seen in 1998.

Energy and food usually account for a higher share of the consumption of poorer households, which are experiencing even higher effective rates of inflation. Real wage growth has turned negative, on average, with greater falls in real incomes in south-eastern Europe.

However, there are still wide variations in the impact of the war on different regions and countries.

Russia's war on Ukraine will cause the latter's economy to shrink by 30 percent this year, the Bank forecasts, a projection unchanged since May. 

For 2023, the EBRD has lowered its forecast to a rebound of just 8 percent from the more robust 25 percent growth forecast in the last report. The expectation back in May was that substantial recovery work would already be underway next year.

Output in central Europe and the Baltic states is expected to increase 3.7 percent in 2022. Upward revisions from May are down to strong outturns in the first half of the year. Growth is expected to slow sharply, to 1.3 percent in 2023, on gas supply disruptions and spill-overs from slower growth in advanced Europe, in particular, Germany and Austria.

GDP in the three south-eastern European Union countries is expected to grow 5 percent in 2022, with growth slowing to 2 percent in 2023. As in central Europe and the Baltic states, this reflects better-than-expected growth in the first half of 2022, but downward revisions for 2023 on reduced gas supply and spill-overs from the slowdown in advanced European economies.

Similarly, output in the Western Balkans is expected to grow 3.2 percent in 2022 and slow to 3 percent in 2023 (revised down from May). The risks to the economic outlook have increased, particularly in light of countries' fiscal vulnerabilities.

GDP in eastern Europe and the Caucasus (excluding Ukraine) is expected to expand by 4.6 percent in 2022 and 2.5 percent in 2023 as temporary stays by Russians boost consumption in Armenia and Georgia.

Output in Central Asia is expected to grow by 4.3 percent in 2022 and 4.8 percent in 2023. Upward revisions to both years relative to May reflect a boost to consumption driven by public-sector wage hikes, high remittance flows and a sharp increase in shadow trade with Russia, as well as gains in commodity exporters.

GDP in Turkey is expected to grow 4.5 percent in 2022, supported by government spending ahead of planned elections and better-than-expected net exports, in part reflecting increased exports to Russia. The Bank's forecast for 2023, at 3.5 percent, is unchanged from May.

Output in the southern and eastern Mediterranean region is expected to grow by 2.9 percent in 2022, though structural problems, external vulnerabilities and limited progress on reforms continue to weigh on the economy. Growth is expected to increase to 4.7 percent in 2023.

/EBRD

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