RECENT ECONOMIC DEVELOPMENTS
After posting higher-than-projected growth of 3.5 percent year-on-year (y-o-y) in the first quarter of 2019, GDP expansion slowed to 3.3 percent in the second quarter. The slowdown was widely expected on the back of negative signals from the Eurozone and particularly from Bulgaria’s major markets - Germany and Italy. On the demand side, the deceleration in the second quarter was due to slower growth in both exports and consumption.
The employment rate reached a 16-year high of 54.7 percent in the second quarter of 2019, while the jobless rate fell to a low of 4.2 percent. Strong labor demand fed into rapid nominal wage growth, reaching 11–13 percent y-o-y in the first half of the year. The 10 percent rise in the minimum wage and 20 percent salary hike for public school teachers in January contributed to this increase.
Higher inflation likely drove the slowdown of real consumption growth in the first half of 2019. Average annual consumer price index inflation in January-July reached 3.3 percent y-o-y, primarily on the back of rising fuel, food, and regulated utility prices.
Yet, inflation apparently supported fiscal performance. After posting only a marginal surplus of 0.2 percent in 2018, in January-July 2019, the general government budget showed a surplus of 2.8 percent of the official GDP projection.
Strong labor market conditions, including decreasing unemployment rates among the uneducated and high real wage growth among low-productivity sectors, supported a continued improvement in poverty reduction.
Poverty is projected to have declined from 8.5 percent in 2015 to 7.1 percent in 2018 (at the US$5.5 per day line). However, income inequality in Bulgaria has been increasing and is the highest in the EU, with the Gini coefficient reaching 39.6 in 2018.
Growth is expected to remain above the EU average in the medium term. Following a relatively strong first half of 2019, the Bulgarian economy is expected to slow down in the second half of the year and further in 2020.
Growth for all of 2019 is projected at 3.2 percent, with final consumption expected to act as a growth driver in the second half of the year while exports wane.
Consumption will be supported by public sector wage and pension increases, as well as a strong rise in employment and salaries in the real sector. Investment growth is likely to pick up in the second half of 2019 as local elections approach in October and the acquisition of military aircraft is accounted for.
Going forward, investment remains largely dependent on EU funds, which are to pick up as the end of the current program period approaches.
The current account balance is projected to remain in positive territory in the medium term but shrink in 2019 compared to 2018, as exports of goods and services underperform in the second half of the year, not least due to a weaker summer tourist season. After a deterioration of the fiscal balance in 2019 due to unplanned expenditure, the fiscal position is expected to improve in 2020.
Poverty reduction is expected to continue at a modest pace in the near term. Sustained improvements in employment and wages and recent increases in pensions should support real incomes and therefore further reductions in poverty.
Poverty is projected to fall to 6.8 percent in 2019 (as measured at US$5.5 a day in 2011 purchasing power parity), to 6.4 percent in 2020, and further to 6.0 percent by 2021.
Last Updated: Oct 18, 2019