Weekly Briefing, Vol. 46. No. 2 (BG) December 2021
Overview of the Economic 2021 year for Bulgaria
Summary
Preliminary data from the Bulgarian National Statistical Institute show that during the year Bulgaria’s economy is slowly recovering from the recession. The Bulgarian National Bank (BNB) said it expects Bulgaria’s gross domestic product (GDP) to grow in real terms and surpass the pre-pandemic level during the fourth quarter of 2021 and the first quarter of 2022. In the third quarter of 2021, seasonally adjusted figures for GDP show an increase of 4.6% compared to the corresponding quarter of the previous year and an increase of 0.6% compared to the second quarter of 2021. At the same time inflation is projected to accelerate considerably to 3.8 per cent at the end of 2021, reflecting the contribution of all major groups of goods and services. The formation of a coalition government in Bulgaria at the mid of December reduces near-term political uncertainty that could have hindered the timely implementation of the country’s EU-funded recovery and resilience plan (RRP).
In 2021 Bulgaria’s economy continued to face the challenges of the global pandemic. The health crisis and political instability in the country have disrupted the investment climate. The decrease of public and private investments has a negative impact on gross domestic product (GDP) development. The inflation is gradually reducing consumption. The political crisis, which lasted from spring to mid-December, also had a significant impact on the country’s economy during the year.
At the same time, the preliminary data of the National Statistical Institute for the Third Quarter of the Bulgarian Economy and the forecasts for the Fourth Quarter of the economic development show that during 2021 year Bulgaria’s economy is slowly recovering from the recession.
In the first half of 2021 real GDP increased by 3.1 per cent from the first half of 2020. The growth was entirely driven by domestic demand and to the largest extent by the increase in private and government consumption, while net exports had a significant negative contribution. Available economic indicators for the third quarter of 2021 show further improvement in consumer confidence.
The forecast baseline scenario assumes that the deterioration of the epidemiological situation in Bulgaria, during the last quarter of 2021, which has been addressed by more localized and targeted measures, will finally have a limited impact on economic activity.
In the third quarter of 2021, seasonally adjusted figures for GDP show an increase of 4.6% compared to the corresponding quarter of the previous year and an increase of 0.6% compared to the second quarter of 2021. According to the preliminary data, GDP at current prices for the third quarter of 2021 reaches 18 475 million EUR in total and 2 680 EUR per person. Gross value added generated by the national economy during the third quarter of 2021 amounted to 31 201 million BGN at current prices.
The crisis caused by Covid-19, the restrictive measures and the sharp deterioration of the economic environment affected all sectors of the Bulgarian economy. However, some sectors have suffered more and are recovering more slowly, while others have already surpassed their pre-crisis achievements.
In agriculture, the usual seasonal dynamics of economic activity is much more sensitive to the effects of the crisis and constraints. This economic sector as a whole appears to be weakly affected by the deteriorating economic situation.
There are visible declines in gross value added in the industry sector, but stable growth has been observed since the beginning of 2021. Undoubtedly, increasing labor productivity and optimizing staff also plays a role, even in the course of the crisis itself.
Construction and building sector, on the other hand, seems relatively unaffected by the crisis. The dynamics of gross value added shows declines compared to the end of 2019. This most likely reflects the freezing of large infrastructure projects. By the third quarter of 2021, employment in construction has already exceeded its pre-crisis levels.
Trade, transport and tourism, for their part, have seen significant declines, coinciding with periods of stricter restrictive measures. It is important to note that this negative trend is mainly due to the collapse of tourism and transport, while trade, especially retail, has remained relatively stable during the year. At this stage, the trend in the three sectors is negative. Despite the decline in value added in these sectors, employment remains relatively stable, most likely due to the transfer of workers between activities within the sector – from tourism to trade.
The dynamics in the ICT sector is particularly interesting, as it is visibly unaffected by the crisis – it continues to add new employment (and increase wages) throughout the period, and there is a steady growth of value added. The dynamics in the other branches related to the digital sector in Bulgaria is similar – the professional and administrative activities, where the outsourcing of various business services is reported. Although they have seen a significantly larger decline in value added, companies in these sectors have chosen to keep up with crisis levels of employment and even hire new people.
The biggest visible decline – up to 67% of pre-crisis levels – is in culture, sports and entertainment. This is largely expected, given that restrictive measures have effectively banned the work of almost the entire sector. However, there is no significant effect on employment.
The brief overview of the change in the main indicators of the individual industries during the year confirms the conclusion that the COVID 19 impact on the Bulgarian economy is far from uniform, and the recovery is not going at a steady pace. While industry and the digital sector have largely turned their backs on the crisis, and construction continues to grow during it, culture, sports, tourism and transport continue to feel its negative effects.
The share of agricultural sector in General Value Added (GVA) of the national economy in the third quarter of 2021 increases its level compared to the corresponding quarter of 2020 with 0.8 p.p. to 7.6%. The Industry sector increases its relative share in GVA of the national economy with 0.6 p.p. to 26.4%. The relative share of the value added of the activities in the Services economic sector decreased to the level of 66.0% compared to 67.4% in the third quarter of 2020.
In the third quarter of 2021, 75.1% of produced GDP is used for final consumption expenditure. Investments form 14.8% of GDP. The external balance (exports minus imports of goods and services) is positive.
According to preliminary data for the third quarter of 2021, final consumption increased by 1.8% and gross capital formation increased by 6.2%. Exports of goods and services decreased by 2.2% compared to the previous quarter. Imports of goods and services increased by 3.3%.
In the third quarter of 2021, compared to the same quarter of the previous year the gross value added increased by 3.1%.
The upward movement of Exports of goods and services is 9.8% compared to the same quarter of the previous year according to seasonally adjusted data. Imports of goods and services increased by 12.7%.
NSI’s preliminary data for the third quarter of the year also showed domestic consumption rose by 1.8 per cent compared to the second quarter of 2021 and was 6.8 per cent higher year-on-year, while gross fixed capital formation was up by 6.2 per cent compared to Q2 2021 and one per cent higher on an annual basis.
Exports in the third quarter were down 2.2 per cent, while imports rose by 3.3 per cent, but still resulted in a trade surplus of 1.82 billion leva, or 5.1 per cent of GDP. Compared to the third quarter of last year, exports were up 9.8 per cent and imports were 12.7 per cent higher.
Inflation is projected to accelerate considerably to 3.8 per cent at the end of 2021 (0.0 per cent by end-2020), reflecting the contribution of all major groups of goods and services. Transport fuels and foods are anticipated to have the highest positive contribution to overall inflation (1.4 and 1.1 percentage points respectively), reflecting the substantial rises in international oil, food and other commodity prices in euro. The inflation is also projected to accelerate at the end of the year and to contribute by 0.9 percentage points to the growth rate of consumer prices, reflecting both the services and non-food goods components. The upward price dynamics will be driven by the indirect impact of price rises in fuels and food on the prices of some services and firms’ higher unit labor, electricity and gaseous fuels costs.
In conclusion, the formation of a coalition government in Bulgaria reduces near-term political uncertainty that could have hindered the timely implementation of the country’s EU-funded recovery and resilience plan (RRP). The renewed dynamism of exports, the strength of investments supported by significant EU funds and the robust momentum of private consumption should stimulate economic activity. Inflation is rising sharply due to the surge in energy prices and the tightening of the labour market, and is expected to see its underlying level reach 2¼ per cent in 2023, the highest rate since 2010.
Stability of the new coalition government in Bulgaria is crucial for medium-run growth and fiscal outlooks as well as meeting a sought 1 January 2024 target date for accession to the euro area. Critical factors, vital for boosting Bulgaria’s growth potential to more than a current (estimated) 2.75% a year include strengthening of the rule of law, tackling of corruption and judicial independence, and developing the institutional capacity required for more effective spending of EU funding.
Bulgaria’s Cabinet has set a 2.5 per cent economic growth target this year in the Budget Act macro-economic framework, with NSI data showing GDP declined by 4.2 per cent in 2020. The European Commission’s autumn forecast projected that the Bulgarian economy would grow by 3.8 per cent this year.