What is the state of Bulgaria's economy at the beginning of 2022?

| Full text of the analysis |

In the context of a historic inflationary and energy crisis in Europe, the state and development of Bulgaria's economy is of particular interest. The almost unprecedented economic circumstances we find ourselves in require more careful and in-depth regular analyses of the macroeconomic situation in the country, in order to build the clearest possible picture of the situation and the most sober possible assessment of the effectiveness and appropriateness of the policies undertaken at the state level.

With this goal in mind, the EKIP, in cooperation with Deloitte and under the auspices of the Confederation of Industrialists and Employers in Bulgaria (CIEB), is renewing the Macroeconomic Monitor section as a regular analysis of the economic situation in the country. The first edition of the renewed section was prepared in June, based on the most up-to-date official economic data published as of 10.06.2022. In it, we assessed the state of the Bulgarian economy through an analysis of indicators such as gross domestic product, consumer price index and producer price index in industry, as well as various indices for industrial production, retail sales and construction production. We also pay attention to key data on the labor market and lending by banking institutions in the country.

The main conclusions of the analysis are as follows:

• Both producer and consumer inflation continued to accelerate in early 2022, reaching their highest level since 1998.
• Gross domestic product (GDP) continues to rise at a healthy pace of 4% in Q1, but has slowed compared to the 5% growth in Q4.
• Final consumption expenditure growth decreased by 2pp (percentage points) in Q1.
• The negative contribution of net exports to GDP rose to its highest level since 2008.
• Household and government consumption growth since the start of the Covid-19 pandemic has been at a higher level than in the period immediately before (2018-2019).
• Meanwhile, unemployment is recording new record lows from Q3 2021 to date.
• We believe these are signs that economic activity has been moving at an unsustainably high pace for several quarters now, which is increasing inflationary pressures.
• We believe that government policy is pro-cyclical, with government spending remaining well above pre-pandemic levels and continuing to rise strongly.
• Q1 GDP data and especially the latest trade data show signs of a slowdown in private consumption, which we believe is due to the pressure of high inflation.
• The outlook for the next 6-12 months is rather negative, as inflation is likely to remain very high while tighter monetary policy globally pushes interest rates up.
• GDP growth is likely to continue to slow through the rest of 2022, with a recession possible in 2023.

The key conclusion of the analysis is that the exceptionally strong growth in aggregate demand is its own worst enemy. It further fuels inflationary pressures, which are starting to weigh heavily on household finances and suppress private consumption. The first signs of a slowdown in consumption are already present in GDP and retail sales data in early 2022. We expect consumption growth to slow further in the second half of 2022. Meanwhile, the rise in bank lending rates, as a result of the European Central Bank’s monetary policy shift, will put additional downward pressure on both consumption and investment growth.

The external economic environment looks unlikely to improve. The war in Ukraine continues, and the conflict between the EU and Russia, which is escalating into a deep energy crisis, does not seem likely to subside anytime soon. We believe that energy commodity prices are unlikely to fall significantly from their current levels by the end of the year. This, combined with the sharp slowdown in economic activity in key external markets such as Germany, means that the contribution of net exports to GDP will remain deeply negative. Uncertainty around gas supplies and the race to quickly secure alternative sources to Russia are putting pressure on gas prices and making them extremely volatile.

Taking all these factors into account, we believe that overall GDP growth will most likely decline throughout the remainder of 2022. As a result of this decline in economic activity growth and due to the higher annual base, we believe that the upward trend in inflation will most likely end in Q4 2022 and price growth will stabilize and possibly even ease in early 2023. We note that even in this situation, inflation will most likely remain in double digits until the end of 2022. As private consumption is under increasing pressure and fiscal space becomes more limited due to already deep deficits and rising interest rates, we believe that there is a real possibility of a recession in early 2023, both in Bulgaria and in the European Union as a whole.

You can read the full text of the analysis at this link.

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