RECENT ECONOMIC DEVELOPMENTS
Economic growth remained strong in 2018, projected to be 3.1 percent year-on-year (y-o-y), though it is expanding at a slower pace compared to 2017. Growth was driven mainly by private consumption (up 5.7 percent y-o-y), supported by rising wages and cheap credit, as well as renewed investment (up 6.5 percent y-o-y) which benefited from the recovery in EU investment funding.
Headline inflation accelerated to 2.8 percent in 2018 due to higher energy prices, robust domestic demand, and higher unprocessed food prices that reflected a disappointing agricultural year.
Fiscal performance remained positive on the back of improved revenue collection. Fiscal revenues grew by 18.1 percent y-o-y in the first nine months of 2018, thanks to strong economic activity, better compliance, and higher minimum wages. Despite higher public wages that resulted in a 12.4 percent increase in the public wage bill and additional budget resources allocated to police and municipalities, the fiscal accounts remained in surplus at 0.8 percent of annual GDP.
Robust economic growth and a tighter labor market led to a decline in the unemployment rate to 5.2 percent as of end-2018, a post-crisis low. At 73.5 percent as of the third quarter of 2018, the employment rate (for people ages 20–64) also improved. However, the working-age population continued to shrink, constraining the expansion of potential growth. Labor and skill shortages, as well as a rising minimum wage, pushed real wages up, albeit at a slower pace than in 2017.
Poverty measured by the upper-middle-income line of US$5.5 per day (in 2011 purchasing power parity [PPP] terms) is projected to have declined from 8.5 percent in 2015 to 7.1 percent in 2018. Bulgaria has the most unequal distribution of disposable income in the EU, and inequality has been increasing since 2013.
The high level of inequality reflects the relatively low redistributive impact of Bulgaria’s fiscal system. When inequality is seen through the lens of market income, before taxes and transfers are paid, Bulgaria’s inequality is close to EU averages. However, Bulgaria’s system of taxes and transfers is relatively less redistributive than in other countries, contributing to a Gini coefficient for disposable income that in 2016 was 40 percent higher in Bulgaria than the EU-28 average.
Growth is expected to remain robust over the medium term. GDP will likely expand by around 3 percent in 2019. Domestic demand will continue to be the main driver of growth, supported by a labor market tightening and additional public sector wage increases. Investment sentiment might be affected by the increasing uncertainty in external markets, but private and public investment should remain strong, supported by low interest rates and EU funding.
Risks to the outlook remain broadly balanced. Weaker growth momentum in Bulgaria’s main EU trading partners and a further slowdown in Turkey, mainly through the trade channel, could undermine export growth, while tightening global financial market conditions could increase the cost of lending to the private sector, with negative implications for investment.
Poverty reduction is expected to continue at a modest pace in the near term. Sustained improvements in employment and wages, as well as recent increases in the minimum pension, should support real incomes and therefore further reductions in poverty. Poverty is projected to fall to 6.9 percent in 2019, as measured at US$5.5 a day in 2011 PPP, to 6.5 percent in 2020 and further to 6 percent by 2021.
Last Updated: Apr 10, 2019