Buoyant growth to slow down, large external imbalances and high inflation are in the forecast for Bulgaria, according to the business prognosis of the European Commission released on Monday.
Economic activity has so far remained robust and resilient to the deterioration in the global economic environment, however, the worsening external conditions are expected to have an impact on Bulgaria by affecting domestic demand.
According to the prognosis, the real Gross Domestic Product (GDP) growth is expected to decrease from 6,5% in 2008 to 4,5% in 2009 while the growing risk aversion among foreign investors could result in a more significant deceleration in capital inflows and investment than assumed; rising interest rates and persistently high inflation may additionally dampen real disposable income and private consumption.
Private consumption expenditure is expected to slow from 5% in 2008 to about 4,5% in 2009. By contrast, public consumption expenditure growth will be further boosted by additional current spending in 2008, reaching around 4%.
According to the publication, after a particularly weak performance in 2007, export growth seems to be recovering in 2008. However, as a result of lower external demand, exports will decelerate in 2009. At the same time, due to weaker domestic demand, import growth will decelerate from 9% in 2008 to around 6,25% in 2009. The trade deficit is expected to narrow only gradually in 2008-2010, inducing a small reduction of the very high current account deficit to about 21,5% of GDP from a level of slightly over 24% of GDP in the second half of 2008.
Employment growth remains strong in 2008. The unemployment rate will maintain its downward trend, falling below 6% in 2009.
Nominal wage growth has accelerated to above 20% in 2008, compared with 18% in 2007, largely as a result of tight labur market conditions. However, part of this wage growth might also be explained by the ongoing reduction in the grey economy triggered by successive cuts in income taxes and social contributions. Moreover, public sector wage developments have been in line with private sector increases. Nominal wage growth is expected to remain high during the forecast period, but it may decelerate as a result of weaker labor demand due to increased wage costs and the economy slowing down in the next two years.
Labour productivity is expected to increase from around 3% in 2008 and 2009 to almost 3ВЅ% in 2010, well below wage growth. As a result, nominal unit labour costs developments will continue to reflect a persistent deterioration of price competitiveness compared with the EU average.
Inflation in Bulgaria has surged in the first half of 2008 and is expected to average 12,5% in 2008. The imminent global economic downturn and the resulting fall in domestic demand could potentially slow inflation to below 8% in 2009, followed by a further deceleration in 2010.
At around 3,25% of GDP, the projected general government surplus is above the official target of 3% of GDP in 2008.
The better-than-targeted surplus is mainly due to higher-than-expected revenue and a result of favorable growth
composition, higher inflation and improved collection of direct taxes.
On the basis of the no-policy-change assumption the general government budget surplus will remain
high at slightly below 3% of GDP in 2009 and 2010. A small decline in the revenue-to-GDP ratio compared to 2008 is linked to a less tax intensive composition of growth, notably a projected slowdown in domestic demand.
In line with strong nominal GDP growth and continued high primary fiscal surpluses, general government gross debt is expected to drop well below 10% of GDP by the end of 2010.
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