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EUROPEAN COMMISSION BOOSTS ITS EXPECTATIONS FOR BULGARIAN ECONOMIC GROWTH

03.05.2018

In its spring macroeconomic forecast the European Commission has increased its forecast of the Bulgarian economic growth to 3.8% in 2018 and 3.7% in 2019 as compared to a growth of 3.7% and 3.5%, respectively, in the winter forecast. Domestic demand is expected to be the main growth driver over the forecast horizon. Positive developments on the labour market and real disposable income growth are set to support strong private consumption, while low interest rates will have a positive influence on private investment. A rise in public consumption and investment is also expected. The main driver of investment growth is expected to be the capital expenditure of the government due to the uptake of EU funds. The contribution of net exports to the GDP growth is set to remain negative.

Risks to the growth forecast are broadly balanced. Higher wages and employment growth could translate into higher demand, while given the favourable credit conditions and EU funds mobilisation, investment activity could turn out even stronger than expected. The main downside risk comes from the external environment, given the openness of the economy.

As to the external sector, over the period until 2019 strong domestic demand in Bulgaria and rising energy prices are expected to keep the country’s demand for imports above the demand for its exports. As a result, the trade balance is set to deteriorate and the current account surplus to reduce further to 1.4% and 0.8% of GDP in 2018 and 2019 respectively.

After the annual HICP inflation reached 1.2% in 2017, the Commission expects it to rise further due to increasing purchasing power of households, rising administrative prices and higher energy prices. The annual average Inflation is forecast to increase to 1.8% in 2018 and remain at the same level in 2019.

Supported by positive developments in economic activity, the strong labour market recovery continued in 2017, with employment growth rising by 1.8% and the employment rate returning to its pre-crisis levels. Employment growth, however, is expected to ease in 2018 and 2019 due to labour supply limits, while the unemployment rate is forecast to continue falling to 5.5% in 2018 and 5.3% in 2019. The nominal growth of compensation of employees/head will remain high, being 7.6% in 2018 and 7% in 2019. The wage increase for certain categories of staff in the public sector is not considered as a risk for the economy’s budget stance.

The Commission forecasts that the strong fiscal stance will be preserved both this year and in 2019, with the general government fiscal surplus of 0.6% of GDP expected in both 2018 and 2019. The reduction of the surplus from 0.9% in 2017 to 0.6% in 2018 is mainly the result of higher capital expenditure through EU-funded programmes, as well as of higher staff costs. At the same time, revenues from indirect taxes, direct taxes and social security contributions are projected to benefit from the positive dynamics of domestic demand and wages.

Bulgaria’s general government debt declined to 25.4% of GDP in 2017. Given the forecast for budget surpluses in 2018 and 2019 and the lower interest costs, the Commission expects the general government debt to decline even further to 23.3% and 21.4% of GDP in 2018 and 2019, respectively.

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