Bulgaria country note: OECD Economic Outlook, May 2021 by OECD

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Bulgaria After contracting by 4.2% in 2020, GDP is projected to rebound by 3.8% in 2021 and 4.4% in 2022. GDP will return to its pre-pandemic level at the end of 2021. The reopening of the economy will create renewed strength in household demand and business investment, which will replace government spending as the main engine of growth. The economic recovery will be reflected in gradual improvements in the labour market. The immediate policy priority is to speed up vaccination, the slowest among EU countries. This will allow restrictions to be reduced and is a prerequisite for the economy to operate at normal levels again. Strong fiscal support should continue in 2021 and then be eased gradually in the following years. Bulgaria expects to receive large EU funds, which, if planned and implemented effectively, would accelerate the recovery and promote investment and productivity. COVID-19 continues to weigh on the economy Like many other European countries, Bulgaria experienced two strong pandemic waves in autumn 2020 and spring 2021, in addition to a milder initial wave. The pandemic threatened the functioning of the health system and pushed COVID-19 mortality to high levels. In response, containment measures were implemented, including limits on group gatherings and the closure of schools and restaurants. Following the peak of the third wave at the end of March, many restrictions were lifted and students returned to school under a phased schedule. Vaccination is being rolled out slowly.

Bulgaria GDP will regain its pre-crisis level at end-2021

Vaccination is slow

Real GDP

Share of population with at least one vaccine dose As of 14 May 2021 % of total population 30

Index 2019Q4 = 100 106 104

102 20

100 98

94 5

92 90

2019

2020

2021

2022

Bulgaria

CEEC¹

OECD

1. CEEC (Central and Eastern European countries) include Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic and Slovenia. Source: OECD Economic Outlook 109 database; and Our World in Data. StatLink 2 https://stat.link/mtdqb9

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021

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Bulgaria: Demand, output and prices

StatLink 2 https://stat.link/g78eqf

The economy has proven resilient in the face of the second and third waves The economy withstood the second and third waves in autumn and spring better than the milder initial wave. GDP rose in the final quarter of 2020 and also in the first quarter of 2021. Business climate indicators underwent a soft patch over the winter months, particularly in sectors that were more affected by containment measures (retail and other services). Recent data indicate that confidence among consumers and businesses is returning. Similarly, people’s movements near recreation and retail locations, and internet searches for consumption services, have been increasing since the trough of the third wave.

Prudent fiscal policy before COVID-19 has permitted a strong fiscal response The fiscal response to the COVID-19 crisis has been strong, and the fiscal balance turned from a surplus of 2.1% of GDP in 2019 to an estimated deficit of 3.5% in 2020. In its 2021 budget, the government announced continued fiscal support that extends the wage subsidy scheme and temporary VAT cuts for hard-hit goods and services and increases financing for healthcare. Nevertheless, public debt is lower than in most OECD countries thanks to prudent fiscal policy, and will remain below 30% of GDP in 2021 (based on the Maastricht definition). Support from EU funds will lift investment and trend output. Grants by the Recovery and Resilience Facility, neutral with respect to the fiscal balance, are expected to total 10% of pre-crisis annual GDP and be used over the next several years.

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The economic recovery is set to continue GDP is projected to rise by 3.8% in 2021 and 4.4% in 2022. By the fourth quarter of 2021, GDP will be back where it was two years earlier, although it will not return by end-2022 to the path projected before the crisis. The COVID-19 crisis will thus have inflicted significant damage, although less than in some other emerging-market economies. The reduction of pandemic-related restrictions is expected to make private demand the main engine of growth again. The labour market will improve more gradually, with unemployment in 2022 exceeding its pre-crisis rate. Uncertainty is high: the projection assumes that Bulgaria will encounter no further significant setbacks in bringing the pandemic under control, but mutations of the virus remain possible and confidence could be slow to return.

Right policy choices would improve the economic outlook The immediate policy priority is to speed up vaccination, so that the economy can operate again at normal levels. However, even in the event of another adverse development, Bulgaria has ample fiscal space that can be used to support households, firms and activity. Investment will be a strong driver of growth into 2022, in part thanks to large EU funds. Effective planning and implementation of projects will be critical to accelerate the recovery and promote productivity. Political co-operation will be important in light of April’s general election and a more fragmented parliament, so that the reform drive to increase competition, reduce the cost of red tape for businesses and fight corruption continues.