In its Eurozone Economic Forecast Winter 2010, Ernst & Young says it expects the Bulgarian economy to shrink by 1% in 2010 overall, and to return to a growth of more than 6% after 2012 (6% in 2012, 6.9% in 2013) – even though the analysis also outlines certain major risks for this scenario.

The forecast points out that despite its currency board system and sound financial policies, Bulgaria experienced a 5% fall in GDP in 2009. However, after a 0.5% quarterly decline in Q1 this year, GDP returned to growth with a rise of 0.5% in Q2, although H1 GDP was still 2.5% below a year earlier.

Ernst & Young says that the unexpected strength in the Eurozone, in particular Germany has helped to lift activity and exports, and thus Bulgaria's GDP posted a second successive rise in Q3, of 0.3%, while in year-on-year terms the economy grew by 0.2%, the first annual rise in almost two years.

The analysis emphasizes the fact that the Bulgarian recovery is driven "almost entirely" by the growth in exports with little sign of investment starting to recover in response to more robust external demand, and a continuing decline in domestic demand.

"Consumer spending remains in freefall, declining by more than 7% in the year to Q3, with both the government and households cutting back in the current uncertain environment. Despite the unemployment rate remaining surprisingly stable at close to 9% in September, very low consumer confidence, rising inflation (which hit 3.9% in October) and another freeze in public sector pay in prospect for 2011 are weighing on household spending. As a result, private consumption is forecast to fall 3.1% in 2010 on top of a 6.2% contraction in 2009," the report concludes.

The forecast further warns that because of the ongoing problems in the Eurozone, the impetus to growth from exports is also likely to fade somewhat, perhaps dampening GDP growth in Q4.

"As a result, we still forecast that GDP will contract by almost 1% in 2010 overall. For 2011, we forecast a return to modest growth of about 3.6%, before a pick-up to around 6% in 2012, but there is a growing risk that tighter fiscal policy – aimed at cutting the budget deficit from an expected 4.5% of GDP this year (compared with the original target of just 0.7%) to 2.5% in 2011 – will keep growth below these forecasts. Consumer spending growth of 2.4% is forecast for 2011 after the 2010 decline but downside risks still dominate the outlook for demand, adding to the fiscal problems confronting the government," it says.

Ernst & Young stresses that a relatively low debt/GDP ratio and the currency board system have helped to shelter the Bulgarian economy against contagion from the southern European crisis so far.

It does warn, however, that the weak EU economy – especially the problems with the southern member states – Greece, Spain, Italy – will affect Bulgaria through a lower demand on some of its major export markets, and through a reduced level of migrant workers' remittances; Bulgarian workers' remittances (equal to 3.3% of GDP) fell by 12% in 2009 and will remain weak in the coming years given the problems these economies face, the report says.

Ernst & Young reminds that the Bulgarian government plans an EUR 1 B international bond issue for 2011 in order to boost reserves.

It says that the Bulgarian government "still hopes that the lev, currently pegged to the euro, will join ERM-II sometime in 2011, with Eurozone entry targeted for 2012. But given the fiscal and debt crisis in the EU and the implications for future entrants (especially those such as Bulgaria that have had Greek-style problems in reporting fiscal data), 2014 now appears to be the earliest possible date for euro entry."

The forecasts and analyses presented in the EY Eurozone Forecast are based on the European Central Bank's model of the Eurozone economy.

In early December, the Bulgarian Parliament approved the 2011 state budget, which provides for an economic growth of 3.6%, and a budget deficit of about 2.75% of the GDP, barely below the 3% threshold of the EU Stability and Growth Pact, which is also required for ERM II and euro zone accession.

Final Eurostat data showed that Bulgaria ended 2009 with a deficit of 4.7%, while the 2010 projections are for a deficit of 4.8%. The efforts of the Bulgarian government to bring down the deficit are also the result of the EU setting Bulgaria under the so called excessive deficit procedure - for EU countries with deficits above 3%.

Tags: Ernst & Young, economic growth, GDP, GDP growth, export, southern Europe, euro zone, remittances