The Bulgarian The economy grew by 4.2% in 2021 and remained fairly resilient in the first half of 2022 with year-on-year growth of 4.5%, driven by strong inventory accumulation, private and public consumption. Private consumption also grew by 4.2% year-on-year over the same period, but momentum slowed amid rising inflation and falling consumer confidence. Investment fell sharply in the second quarter as businesses faced heightened uncertainty, and was 14% below pre-pandemic levels.
Nevertheless, industrial production increased by almost 17% year-on-year in the first half of 2022, as the manufacturing sector remained resilient despite the Russian gas shutdown since April 2022. Inflation worsened considerably, reaching 17.3% in July 2022, and above. 20% for food, utilities and housing, transportation and restaurant and hotel prices. The government’s main measure against rising energy costs is the full compensation of company electricity bills above €125/MWh.
Households were protected through regulated tariffs and pensions were increased by 10% in July 2022.
The current policy crisis may lead to delays in the absorption of the second installment of the EU Recovery and Resilience Facility. Due to the robust performance in the first half of the year, GDP growth has been revised upwards for 2022 to 3%, but uncertainty over gas supply, weakening domestic and foreign demand amid High inflation and deteriorating confidence, as well as political uncertainty, could result in modest growth of 1.5% in 2023.
Reduction in gas supply and inflation to further slow growth in EBRD Regions
The Bank forecasts growth of 2.3% in 2022 and 3% in 2023
- Growth forecast for 2023 revised down 1.7% from May
- Gas prices in Europe average around 2.5 times 2021 levels
- Inflation in the EBRD regions reached 16.5% in July
Reduced gas supplies from Russia and rising global inflation will slow economic further growth next year in regions where the European Bank for Reconstruction and Development (EBRD) works, predicts the Bank today.
The projections, contained in the EBRDis the last Regional Economic Outlook report, are subject to major downside risk if Russia’s war on Ukraine escalates or its gas export volume declines further.
The Bank now forecasts gross domestic product (GDP) growth in its regions of 3% in 2023, a downward revision of 1.7% from its last report in May.
However, an upward revision to forecast growth this year will likely result in a milder slowdown in real terms, with output next year just 0.5% lower than early summer forecasts.
Exit in the EBRD is now expected to grow 2.3% in 2022 after consumers in emerging Europe embarked on a post-pandemic spending spree in the first half of the year.
This temporarily boosted consumption, despite falling real wages, and led to a sharp widening of current account deficits across Central Europe.
EBRD Chief Economist Beata Javorcik said: “These are very worrying times for the EBRD regions and many advanced economies. As we head into winter, the economic The cost of Russia’s war against Ukraine is becoming clearer day by day.
“Inflation may not have peaked EBRD regions as in many countries, rising production costs and high natural gas prices have not yet fully passed through to consumer prices.”
The regional news Economic Insights Report, titled A cold winter in prospect?paints a stark portrait of the impact of war on EBRD energy markets, inflation and regional economies.
Since the end of February, gas prices in Europe have averaged around 2.5 times their 2021 level (in inflation-adjusted terms).
For many countries in the EBRD regions, higher gas prices imply increases in gas import bills equivalent to 4-5% of GDP, as economies are highly dependent on gas in their energy mix.
Gas accounts for the bulk of the derived heat production in the EBRD Regions. In some economies, gas is also an important source of electricity generation. Even when the electricity does not come directly from gas, the prices of electricity and gas tend to evolve in parallel.
Average inflation in the EBRD regions reached 16.5% in July, a level last seen in 1998.
Energy and food generally represent a higher share of the consumption of poorer households, which experience even higher effective inflation rates. Real wage growth has turned negative, on average, with larger declines in real earnings in Southeast Europe.
However, there are still great variations in the impact of war on different regions and countries.
Russia’s war on Ukraine will cause the latter’s economy to shrink by 30% this year, according to the Bank’s forecast, a projection unchanged since May.
For 2023, the EBRD lowered its forecast to a rebound of just 8% from the more robust growth forecast of 25% in the last report. In May, it was expected that substantial recovery work would already be underway next year.
Exit in Central Europe and Baltic States is expected to rise 3.7% in 2022. May upside revisions are down for strong first-half results. Growth is expected to slow sharply, to 1.3% in 2023, due to gas supply disruptions and spillovers from slowing growth in advanced Europe, particularly Germany and Austria.
GDP in the three South East European Union expected to grow 5% in 2022, with growth slowing to 2% in 2023. As in Central Europe and the Baltics, this reflects better than expected growth in the first half of 2022, but downward revisions for 2023 on gas supply and the fallout from the slowdown in advanced European economies.
Likewise, the output in the western balkans is expected to grow 3.2% in 2022 and slow to 3% in 2023 (revised down from May). The risks for the economic prospects have improved, particularly in light of countries’ fiscal vulnerabilities.
GDP in Eastern Europe and Caucasus (excluding Ukraine) is expected to increase by 4.6% in 2022 and 2.5% in 2023, as temporary stays by Russians boost consumption in Armenia and Georgia.
Exit in Central Asia is expected to grow by 4.3% in 2022 and 4.8% in 2023. The two-year upward revisions from May reflect an increase in consumption driven by wage increases in the public sector, inflows of high remittances and a sharp increase in parallel trade with Russia, as well as gains among commodity exporters.
GDP in Turkey is expected to grow by 4.5% in 2022, supported by government spending ahead of the scheduled elections and better-than-expected net exports, partly reflecting higher exports to Russia. The Bank’s forecast for 2023, at 3.5%, is unchanged from May.
Exit in the southern and eastern Mediterranean The region is expected to grow by 2.9% in 2022, although structural issues, external vulnerabilities and limited progress on reforms continue to weigh on the economy. Growth is expected to reach 4.7% in 2023.
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