06.11.2020

In its Autumn Forecast, the European Commission has adjusted to 5.1% its expectations for Bulgaria’s GDP drop in 2020, from 7.2% in the spring. According to the Commission, the country’s economy started to recover after a steep downturn in the second quarter. Subdued consumer confidence and increased uncertainty will continue to influence consumption and investment by the end of the year. The GDP growth is expected to reach 2.6% in 2021 and 3.7% in 2022. Both exports and consumption are set to contribute positively to growth in the next two years, in line with positive external demand and labour market developments. According to the Commission’s estimates, in 2020, as compared to the data for the 27 Member States, our country has the lowest budget deficit, ranks third in terms of lowest debt and has a GDP drop lower than the EU average.

The European Commission notes for Bulgaria that after the registered fall in goods exports in March and April, they showed signs of recovery, mainly in terms of trade with EU countries. During the second quarter, there were almost no revenues from travel services to foreigners in the country and the flows have improved only slightly since then. The European Commission forecasts that the second wave of the pandemic will have a negative impact on exports in 2020-Q4 and 2021-Q1.

The risks to the forecast are balanced. It does not take into account the funds that the country will receive under the EU Recovery and Resilience Facility, which poses an upside risk. On the downside, more depressed business sentiments could lead to lower investment in the next two years.

The European Commission expects the unemployment rate to increase to 5.8% in 2020. The forecast takes into account the considerable increase in unemployment during the first half of the year, as well as the positive effect on limiting job losses as a result of the employment support scheme implemented by the government. A partial recovery in employment is projected to take place in 2021 and the unemployment rate is set to reach 5.6%, dropping to 5% in 2022. Wages’ dynamics is expected to remain on an upwards trajectory, in part driven by public sector wage increases, as well as increases in minimum wage. However, the growth rate of the indicator is expected to slow down to 4.7 % in 2020 and 2021 and 4.0 % in 2022.

Inflation has been on a downward path since the beginning of the year due to lower fuel prices. Annual average inflation is expected to fall to 1.2% in 2020 and then gradually increase to 1.4% in 2021 and 1.8% in 2022. In the next two years inflation will be driven mainly by services inflation, continuing the upward trend in recent years.

The European Commission points out that Bulgaria is facing the COVID-19 pandemic from a strong fiscal position. The government has put in place measures such as higher remuneration for medical and security staff, subsidies and social support schemes, with an aggregate budgetary impact of around 2% of GDP. The accrual general government balance is set to turn negative at the end of 2020, reaching around 3% of GDP. In 2021, the budget deficit is forecast at around 3% of GDP, too. The economic recovery will have a positive impact on budget revenues, but a number of expenditure measures to preserve jobs and support incomes through wage increases and social benefits will have a negative impact on budget deficit. Under a nopolicy-change assumption, the European Commission forecasts that budget deficit is set to drop to 1.4% of GDP in 2022.

General government debt is expected to increase by more than 5 pps. and reach 25.7% of GDP in 2020 and 26.5% of GDP in 2021, before returning to a downward trend in 2022. Except for the primary budget deficit and the contraction in GDP, debt increase also reflects the establishment of a cushion in view of the emergency situation.