Bulgaria’s economy is expected to improve modestly in 2014. Inflows of FDI should provide some support as the recovery in Europe gathers momentum. A better agricultural performance and higher levels of public spending are seen as other growth drivers. The jobless rate, however, remains in double digits. Much of the unemployment has become structural in nature and is therefore harder to address. Officials aim to cut the budget deficit to 1.8% in 2015. Based on per capita income, Bulgaria is the poorest member of the EU with living standards less than half its average. It will require more than 20 years for the country to achieve a per capita income that is two-thirds of the EU average. Growth has been feeble since the global recession and output still remains below pre-crisis levels.
Bulgaria's economy has continued to struggle during the present decade. Real GDP grew by less than 1.0% in each of 2012 and 2013 – well below the economy's potential. Productivity gains have been limited, as a result of which Bulgarian firms have been losing ground at a time when EU membership has exposed them to greater competition. A drop-off in foreign investment has added to the country's problems.
GDP is expected to grow by a real 1.6% in 2014, up from 0.9% in 2013. Inflows of FDI should provide some support as the recovery in Europe gathers momentum. A modest improvement in agricultural performance and higher levels of public spending are seen as other growth drivers. The economy grew by 1.1% in the first quarter of 2014 on an annual basis.
Average annual inflation was 0.9% in 2013
and is expected to fall to 0.6% in 2014.
The real value of private final consumption fell by 5.0% in 2013 and an increase of 1.9% is forecast for 2014. Steady gains in real wages, along with a rise in discretionary pensions, add to consumers' purchasing power. In addition, over one million Bulgarians work abroad and their remittances support consumer spending. In 2013, remittances totalled $1.6 billion.
Unemployment was 13% in 2013 and that is not likely to change in 2014. Employment rose in 2013 but more people have also returned to the work force, preventing the jobless rate from falling. Low-skilled workers represent 70% of the unemployed. The jobless rate is the highest among young adults, ethnic minorities and rural residents. Much of the unemployment has become structural in nature and is therefore harder to address.
The government expects foreign investment to rise to 1.7 billion euro in 2014 and 1.8 billion euro in 2015. Officials also plan to increase the absorption of the EU structural funds significantly.
Evaluation of market potential
Bulgaria's economy depends heavily on exports for its growth momentum, but improvements in domestic demand should help support the economy in the medium term. Annual rates of growth are expected to exceed 3.0% per annum over the next several years. To realise these rates of growth the government will still need to attract more investment by cutting bureaucracy and corruption.
In the longer term, growth prospects could be limited by significant population decline owing to emigration and ageing. Both these factors will likely reduce growth potential.
Given present demographic trends, the potential for further employment growth is limited. Marginal gains in employment will be accompanied by a steady decline in the unemployment rate. Thus, the labour market situation will become increasingly tight, with shortages developing in some industries. This is expected to lead to noticeably higher wage gains in the future.
Bulgarian exporters depend heavily on other European markets. Exports to other EU markets amounted to 59.7% of the total in 2013. Basic manufactures made up 22.4% of the total. In dollar terms, Bulgarian exports grew by 10.7% in 2013 and a decline of 0.6% is expected in 2014.
The competitiveness of Bulgarian exporters is jeopardised by a steady rise in energy prices. The impact of higher prices is accentuated by the fact that Bulgarian manufacturers are relatively inefficient users of energy.
As a share of GDP, exports amounted to 55.7% in 2013, up from 43.4% in 2008.
The current account surplus was 3.1% of GDP in 2013. A surplus equivalent to 0.5% of GDP is expected in 2014.
The government intends to simplify company registration and licensing procedures, expand one-stop shops, and intensify efforts to combat corruption. Its goal is to reduce the administrative burden on companies by 20%. Plans to increase efficiency in the energy sector and health services will support growth and employment.
The informal sector represents at least a third of GDP. Although workers are relatively well educated, skill shortages are a constant problem.
Government spending is relatively high, leading to concerns that it may crowd out private investors. Officials plan to hold public expenditures to less than 40% of GDP in the future. Reforms in health, public administration, and pensions are still needed to bolster the process of fiscal consolidation.
Bulgaria lacks an independent judiciary system. Increases in excise taxes and reforms to ensure better compliance should prevent a further drop in tax revenues. Further reforms are also needed to improve the business climate.