RECENT ECONOMIC DEVELOPMENTS
Similar to 2015, GDP continued to expand at around 3% per year in the first half of 2016. Economic activity was supported by strong domestic demand that benefited from continuing labor market improvements, low inflation, and an increase in inventories. Household consumption remained strong, as declining unemployment, rising wages, and low inflation boosted real household income.
Unemployment declined by close to 2 percentage points year-on-year (to 8.2% in the second quarter of 2016), while new jobs were created in the sectors - such as industry, trade, and tourism - that were the hardest hit during the 2009 crisis and that employ a relatively large share of low-skilled labor, boding well for poverty reduction.
With strong economic growth and positive developments in the labor market, the US$5/day and US$2.5/day poverty rates are estimated to have come down slightly from 15.4 and 5.5%, respectively, in 2014 to 14.5 and 5.0%, respectively, in 2015. Inactivity among certain groups of the population is high as a result of an education system with deteriorating quality and rising inequality, and a large number of people remain excluded from economic opportunities, such as the elderly, people living in rural areas, and the Roma.
Accelerated economic activity and the slow implementation of public investment projects have strengthened Bulgaria’s cash fiscal position. The fiscal surplus in the first seven months of the year was 3.7% of annual GDP. Tax revenues were boosted by strong economic activity and compliance measures, while spending declined due to the slow start of EU-funded capital projects. Government debt increased to 30.3% of GDP in the first quarter of 2016, as the Government issued new debt as part of its medium-term debt strategy. Debt remains the third lowest in the EU.
The external current account was again in surplus in the second quarter of 2016, supported by a further narrowing of the trade balance. Bulgaria exported more investment and consumer goods, especially to the EU, while import growth was modest in line with low oil and commodity prices.
GDP growth is projected to slow to 2.7% in 2016, as the impact of the higher absorption of EU funds on public investment and consumption diminishes with the start of the new financing period. Household consumption is likely to continue expanding, while private investment is likely to offset the sharp reduction of EU-funded public investment.
Going forward, the economic recovery is projected to be modest, with growth picking up to 2.9% in 2017 and 3.1% in 2018. Recovery of external demand is likely to be slow as a result of the weakening outlook in emerging markets, lingering geopolitical tensions in the region, and uncertainty related to the United Kingdom’s vote to leave the EU.
Poverty is projected to continue on its gradual downward path in the near term. Poverty at US$2.5/day is expected to decline slightly to 4.8% in 2016, 4.4% in 2017, and 4.1% in 2018, while the US$5/day poverty rate will further fall to 13.8, 13.1, and 12.3%, respectively.
The external current account is expected to continue to be in surplus, although likely decline by 2018. Export growth is expected to slow in response to a weakening outlook in emerging markets. Import growth is likely to be affected by weakening domestic demand for investment goods.
Last Updated: Oct 03, 2016