04.11.2014

The European Commission expects the real GDP growth of Bulgaria to remain muted, falling from 1.2% in 2014 to 0.6% in 2015 and 1% in 2016. As a key reason for that it indicated the weak domestic demand. After an expected deflationary period in 2014, inflation is set to only slowly pick up to 1% in 2016. Following a sizeable fiscal deterioration in 2014, the general government deficit is projected to remain above 3% of GDP over the forecast horizon.

Key macroeconomic indicators

                                                                                     Source: EC, MF, NSI

The forecast of the Commission differs from that of the Ministry of Finance mostly in terms of domestic demand, which results in significant differences in relation to real GDP growth over the next two years. For 2014 both institutions expect consumption and investments to have a positive contribution and net exports to have a negative contribution to real growth formation. The Commission expects that the deterioration of the business climate witnessed in key sectors of the economy since June, as well as the more pessimistic expectations of households will result in lower increase in household consumption, while its expectations in terms of investments are for a decline resulting from both private investments and weaker absorption of EU Funds as the current programming period is coming to an end. In its forecast the Ministry of Finance does not expect the uncertain economic environment to preserve in 2015 and to lead to lower consumption growth and decline in the gross fixed capital formation.

The forecast of the Commission for the average annual inflation for 2014 is for a deflation higher by 0.3 p.p. compared to the plan of the Ministry of Finance, and the average growth of consumer prices in 2015 and 2016 is also expected to be lower (by 0.5 p.p. and 0.1 p.p. respectively). The reasons for the difference can be sought mainly in the assumptions underlying the two forecasts, where the forecast of the Commission assumes lower prices of the Brent oil in both USD and EUR as a result of the considerable decline in international oil prices over the last two months and the downward trend in futures' prices, respectively. According to the forecast of the Commission, the slower recovery of domestic demand will also contain prices' growth.

The forecast of the Commission envisages the general government deficit for 2014 to be 3.6% of GDP, which coincides with the estimates of the Ministry of Finance for the budget balance on an accrual basis. Over the next two years the Commission expects a further deterioration of the balance down to -3.7% of GDP for 2015 and -3.8% of GDP for 2016, using as a basis the assumption of a no-policy-change and not including measures for deficit reduction. The estimates of the Ministry of Finance envisage application of consolidation measures in 2015 aimed at reaching a deficit of 3% of GDP corresponding to the reference value of the budget balance according to the requirements of the Stability and Growth Pact. For the next years it envisages a step of 0.5 p.p. of GDP to reduce the deficit under CFP.

The Commission expects the weak economic growth to result in slight decline in employment in 2014 and 2015. The forecast of the Ministry of Finance is comparable to that of the Commission as a trend, being, however, slightly more optimistic given the reported current reduction of unemployment rates and the expected higher economic growth rates in the medium term. The levels of unemployment in the two forecasts are identical and the expectations are for preservation of the downward trend. The expectations for the income dynamics are also close and are related to a considerable slow-down in the growth rate of the indicator for 2014 and 2015.

The Commission also assumes tightening of credit standards and deceleration of banks' credit activity, which would depress private investments. According to Bulgaria's scenario, credit activity decelerated but it was due to the weaker demand for loan resources and not to a more conservative policy of banks. The forecast of the Ministry of Finance envisages uncertainty to be overcome and confidence among consumers and investors to improve in the second half of 2015 which would lead to higher contribution of domestic demand to economic growth as compared to the expectations of the Commission.

You can see the autumn economic forecast of the European Commission here.