Higher than originally expected economic growth and inflation in 2021 and 2022, but also a slower recovery of the labor market. Households will continue to shop at a slightly more moderate pace next year compared to pre-pandemic 2019. However, depressed consumption will be compensated for by a new strong engine - the billions expected to flow into Bulgaria under the EU's Recovery and Resilience Plan. In addition, the tourism sector is expected to continue recovering, if it is not fatally hampered by new strong waves of COVID-19.
This is a summary of the expectations of the Ministry of Finance for the development of Bulgaria's economy this year and next published in its latest autumn macroeconomic forecast. According to the ministry, Bulgaria's economy is expected to rebound to growth of 4% this year that will accelerate to 4.9% in 2022. Strong domestic demand in the first half of 2021 has prompted the ministry to increase its GDP growth projection for 2022 from 3.6% forecast in March.
Strong public and private investment, bolstered by expected hefty inflows from the European Union's coronavirus recovery fund, and improved economic environment will further boost growth in 2022. The economic recovery and high global oil prices are expected to spur inflation to 3.8% at the end of 2021, which should slow to 2% at the end of 2022, the ministry said.
A broader picture is provided in the World Bank's Fall 2021 Europe and Central Asia Economic Update report. It says that Bulgaria's GDP growth is expected at 3.7% in 2021 and 3.8% in 2022, before slowing down to 3.6% in 2023. The World Bank also notes that a shrinking of the budget deficit is likely to be postponed to 2022 due to the extension of Covid restrictions.
Moreover, it says that the ongoing political crisis in the country implies slow pace of reforms and small chances for investing the European money from the Recovery Plan before 2022. At the same time, the low levels of vaccination (about 20% of the population compared to the EU average of 75%) carry the risk of new lockdowns.
"Going forward, the authorities would need to engage in fiscal consolidation, including the challenging withdrawal of support measures, as soon as the recovery gains momentum", the World Bank notes.
The finance ministry also says that a new wave of the pandemic that will trigger tougher restrictions and a failure to efficiently tap the EU recovery funds would pose risks to its forecast.
Last week, the caretaker government introduced new anti-COVID-19 measures which include a requirement for a green certificate for indoor venues in order to accelerate the pace of vaccination.
Year of investments and inflation
Most economists expect the Bulgarian economy to return to pre-crisis levels in early 2022. Another assumption of the finance ministry is for GDP to amount to 138 billion levs (70.6 billion euro) next year. Unlike the finance ministry, however, the World Bank and UniCredit Bulbank, which also updated their forecasts recently, predict economic expansion of 3.8% and 3.9%, respectively, for next year.
The higher growth rate forecast by the Ministry of Finance is based mainly on an expected rise in investments, which are projected to increase by almost 14% mostly on the back of money from the Recovery Plan. Bulgaria, which will hold its third general election this year in November, expects to receive over 6 billion euro in EU recovery grants.
At the same time consumption, which has been the strongest economic growth driver this year, will increase at a more moderate pace (3.5% on an annual comparison basis), and the net contribution of exports will be negative.
The risks - low vaccination levels, political crisis
Although the institutions forecast different rates of economic growth, their estimates of the risks to the expected recovery look much more consistent. And these risks are not to be underestimated, because the low levels of vaccination in the country and new waves of the pandemic mean new closures, additional state expenditure for anti-Covid measures and canceled tourist reservations at winter resorts.
Another risk is the ongoing political crisis which makes it hard to predict what will happen in the next few years. Also, the finance ministry sees "problems in international supply channels in 2022" as a risk because they could limit supply and may result in lower-than-expected growth.
According to the World Bank, the main challenges to the country's development in the long term are slightly different: its low productivity, inequality in incomes and opportunities, the country's takeover by private interests, and the expensive transition to a low-carbon economy.