Bulgaria’s economy will grow by 2.7 percent this year
Bulgaria’s pre-economic outlook continues to be dominated by the conflict between Russia and Ukraine and its impact on commodity prices, as well as supply chain disruptions caused by higher inflation. However, this relatively large number of indicators indicates that the growth rate reached a very strong level before the beginning of the Russian invasion of Ukraine in late February. The strength of the recovery in the first quarter may be best illustrated by the index of industrial production, which posted its strongest annual growth in more than two decades. These results led us to raise our GDP growth forecast for this year to 2.7% from 1.4% in April. This is recorded in the latest macroeconomic analysis of “UniCredit Bulbank”.
Economists at the financial institution expect the economy to contract slightly in the second quarter on a quarterly basis. They are based on industrial production and consumer confidence facing a range of challenges stemming from supply chain disruptions and rising prices as a result of ongoing coronavirus restrictions in parts of China, as well as the conflict between Russia and Ukraine . Along with this, a slight increase in growth on a quarterly basis is expected in the third quarter, tips to activate the government’s fiscal support measures, continued wage increases in some sectors of the economy in the context of a tight labor market, and tips to ease the impact on some of the obstacles to industrial activity.
UniCredit Bulbank analysts revised down forecasts for first-year GDP growth to 2% year-on-year from the 3.5% they expected in April. This mostly reflects higher oil and gas prices in our global scenario, suggesting higher and sustained inflation that will act as a drag on real income growth. “Furthermore, our global scenario foresees higher interest rates in the Eurozone in addition to slightly weaker GDP growth for some of Bulgaria’s key trading partners (compared to the forecast made three months ago), which will affect volume per amount”, the bank emphasizes.
Political uncertainty rose again,
after the government of Prime Minister Kiril Petkov was forced to resign. From now on, we see two equally likely scenarios, the experts of “Unicreti Bulbank” note. In the first, we think there is a good chance that the four parties from the previous ruling coalition will form the new government, perhaps one with a limited mandate for reforms that will implement more than the budget changes agreed to mitigate the negative effects of inflation. In this scenario, it is likely that Kiril Petkov, the founder and chairman of the largest parliamentary party, will not be the next prime minister, but will be replaced by one of the other leaders of “We continue the change”. In the second scenario, the parliament will be dissolved and new parliamentary elections will be held in the autumn.
In both scenarios, analysts from the bank do not expect major changes in the economic policy. “This is because we believe that the main reason for the fall of the government of Mr. Kiril Petkov is Bulgaria’s position on the negotiations for the accession of North Macedonia to the EU, and not its economic policy. We continue to look at the adoption of the euro in 2024 as the most likely scenario, since parties with a pro-Western geopolitical orientation taken together can count on the support of the majority of Bulgarian voters,” the analysis reads.
With new elections, the transition to the new government will delay decision-making in the public administration. This is bad news for public sector capital spending and the country’s chances of accelerating the green transition and digitization. It could also jeopardize the country’s entry into the eurozone in 2024, especially if the next election results in an increase in support for populist parties.