Bulgaria

Economic recovery, but outlook remains fragile

The Bulgarian economy kept a robust pace in the first nine months of 2019 and fresh high frequency data suggests that the growth dynamics remained on a solid footing in the last quarter of the year. Industrial sector performance, which was rather sluggish for the most part of 2019, saw a surprising rebound in October; on year-on-year basis industrial production increased by 1.7%, following an upward revision to 0.7% in September. This largely reflects a return to growth in both the manufacturing sector and the mining industry, while the decline in the utilities sector continued and even accelerated. Together with gradually improving business confidence (figure BG) - especially in the manufacturing sector - the latest developments suggest that a cautious recovery of industrial production might be underway.

 

Meanwhile, retail sales in October picked up by 1.2% yoy, slowing from 2.6% yoy in the previous month. On a monthly basis, retail sales declined by 0.1%, marking a third month in a row of a relatively sluggish reading. The current softness is mainly concentrated in pharmaceuticals and cosmetics, while trade with textiles or computers continues to grow at a healthy pace. Still, looking at ongoing positive sentiment among retailers (well above the long-term average), the modest slowdown should not, in our view, fundamentally shift otherwise sound private consumption dynamics.

Overall, we expect that economic activity remained solid at the end of last year, albeit slightly weaker than in previous quarters. This should bring annual real GDP growth to 3.7% in 2019. This year, our expectation is for a gradual slowdown in growth dynamics to 3.1% on the back of a softer external backdrop that is set to weigh on the export performance. Hence, growth is expected to be underpinned by domestic demand, namely household consumption driven by favourable developments in the labour market, and a mildly expansionary fiscal policy. While investment growth is likely to be adversely affected by continued uncertainty and a challenging external environment, it may benefit from the disbursement of EU funds as the end of the 2014-2020 funding period is approaching.

Despite a mildly expansionary fiscal policy, the budget deficit is set to end up lower than expected. For the first 11 months of 2019 the consolidated budget surplus stood at BGN 1.3 billion, equivalent to 1.1% of projected gross domestic product. This was mainly driven by better tax collection and to a lesser extent by some spending cuts. As a result, the Bulgarian ministry of finance now expects that the budget shortfall will reach 1% of GDP in 2019, significantly outperforming its target for a 2.1% deficit. Although this will break a period of three years of budget surpluses, the public finances remain in overall good shape, particularly since the deterioration in the budget balance is largely the result of the lump-sum payment for F-16 fighters. This is confirmed by the low public debt-to-GDP ratio, which is projected to have fallen to 19.9% in 2019.

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