Quarterly macroeconomic analysis of UniCredit Bulbank:
Economic growth in 2022 will remain at last year’s levels amid growing fears of inflation
Economists of UniCredit Bulbank forecast economic growth of 3.6% in their latest report. Experts slightly reduce the forecast for annual GDP growth for 2022, compared to the expected 3.9% three months ago, due to more severe and prolonged disruptions in supply chains and the looming higher and longer-term inflation. Its growth is projected to reach 6% on average for the whole of 2022, with the main reasons continuing to be related to high energy prices, supply chain disruptions, and base effects. Economists expect these factors to have a temporary effect in 2023, inflation to fall to 3% on average for the year, and economic growth to accelerate to 4.3%, with unemployment falling to levels corresponding to full employment.
Bulgaria: 7.8% annual inflation in December
Economic forecasts for inflation are based on the assumption that electricity and heat prices for households will rise by 15% in April 2022. According to economists, inflation will have an adverse effect on consumer confidence and the structure of GDP is likely to change.
Increase in investments at the expense of private consumption in the structure of GDP
Private consumption will contribute less to economic growth in 2022 than in 2021, mainly due to projected higher consumer price inflation. This year the rise in prices will reduce the disposable income of households to a much greater extent than in 2021. Despite lower consumption levels, economists at UniCredit Bulbank expect an increase in investment growth, driven mainly by larger projects in the public sector. They expect public investment in support of the green transition and digitalization, funded by the EU’s Next Generation mechanism, to stimulate potential growth, with the necessary reforms.
Without a significant increase in wages
The expected higher inflation in 2022 will not lead to a significant increase in wages, according to a new analysis by UniCredit Bulbank. Unemployment and other important labor market indicators show that the economy has not yet reached full employment. It is also important to note that the share of managers who report problems with finding labor now compared to the period before the pandemic is lower in Bulgaria than in other CEE countries (see chart), for which such data are available. All this indicates that the process of recovery in the labor market is slower in Bulgaria than in most CEE countries, and this has a positive side, as what is happening in the labor market is not among the factors contributing to the increase of inflation at the moment.
Graph 1: Bulgaria has a smaller labor shortage compared to CEE countries
Bulgaria; Poland; Croatia; Czech Republic; Hungary; Romania; Slovakia; Slovenia
The development of the economy in 2022 will continue to be closely linked to the course of the Covid-19 pandemic. Despite the emergence of the new variant Omicron, the prospects are for vaccines to remain effective and for the percentage of the vaccinated population to increase, although most likely leaving below the required values to achieve group immunity. Under these conditions, the negative impact of new waves of the pandemic on the growth trajectory should be more limited than in the past.