Recent Economic Developments
Following a contraction by 4.2 percent in 2020, the economic recovery gained momentum in the second quarter of 2021 with robust growth in export, consumption, and investment. The economy is forecasted to expand by 3.7 percent in 2021 even if it is not likely to reach its pre-crisis levels before 2022. So far, and in contrast to some peers, inflation remains under control, at 3.7 percent year-on-year (y-o-y) in August 2021, but may accelerate in the reminder of the year on the back of import inflation.
The labor market showed initial signs of improvement in the second quarter of 2021 when unemployment declined to 5.6 percent. The banking sector remains stable, with nonperforming loans at 6.7 percent as of end-June 2021 against 8.1 percent a year ago.
The fiscal stance loosened notably in 2020 due to the economic downturn and the Government’s support measures. The deficit reached 3 percent of GDP in 2020 and is projected to widen further in 2021, as most private sector support measures remain in effect while temporary pension supplements have been transformed into a permanent increase in pensions. Even if public debt grew in 2020 due to the deficit financing needs, it remained relatively low by EU standards at 25 percent of GDP as of end-2020.
In the near term, the biggest risk to the economic recovery is the slow pace of COVID vaccinations - the slowest in the EU to date. With some 36 doses per 100 population administered as of end-September compared to more than 100 in most EU countries, Bulgaria is heading toward another peak of infections in early autumn, which may lead to new restrictions, depending on the capacity of hospitals to handle the wave.
Potential restrictions would also weigh heavily on an already stretched budget and could lead to further overshooting of the deficit above 4 percent of GDP in 2021 before the country embarks on fiscal consolidation. As the national plan is yet to be finalized, absorption of the EU Recovery and Resilience Facility (RRF) envelope for Bulgaria is not likely to start before 2022, which would put an additional strain on the budget.
Political instability is another source of risk to the outlook. The country is heading toward a third round of early elections in November following snap elections earlier in the year that failed to produce a ruling majority.
Poverty is anticipated to decline from 6.8 percent in 2020 to 6.2 percent in 2021, using the upper-middle-income purchasing power parity poverty line of $5.50 per day. The decline is largely attributable to improvements in household finances stemming from a rebound in the labor market as well as continued government support in the form of wage subsidies and pension supplements. Despite these improvements, poorer households continue to report higher levels of economic distress as the longevity of the crisis strains already limited economic resources.
Last Updated: Oct 13, 2021