The team of economists of UniCredit revised this year’s forecast for growth of the Bulgarian GDP from 1.9% to 2.1%.

Against the background of favourable external environment at the beginning of the year, the growth rates in Central and Eastern Europe offered a positive surprise, but those in Russia, Ukraine, the Western Balkans and especially Turkey remained disappointing as a whole. Those were the words of the internationally renowned Bulgarian financier Lyubomir Mitov during his first official presentation to the Bulgarian media as UniCredit’s Chief Economist for CEE. The recovery in the CEE countries is due to the combination of a greater demand in the Eurozone, abundant liquidity thanks to the quantitative easings by the European Central Bank, a decline in the energy prices, but also to a lack of significant macroeconomic imbalances as well as the measures in support of the growth which governments continue to undertake.

What is the situation in the region?

“Despite the highly favourable environment, the growth rates in the various CEE subregions are characterized by growing differences”, Lyubomir Mitov explained. Generally, the GDP growth in the first quarter of this year surprised positively the CEE EU member states, but was disappointing in almost all of the other countries. These growing differences in the recovery rates reflect the differences in the level of integration of the individual countries with the Eurozone economy, the quality of the implemented business policy, the political stability as well as the progress achieved in the structural reforms. In respect of all those factors, the CEE EU member states are ahead of the other developing markets in the region. Their integration in the production chains of the main European companies is particularly deep, as for all of them the export to the Eurozone countries varies between 45% and 75% of the GDP. This enables the CEE EU member states to benefit to the greatest extent from the recovery of the demand in the Eurozone. The lack of serious macroeconomic imbalances is an important factor which supports the growth of the GDP.

“Unlike the recent past, the growth in the region this time has a much wider basis – increase of the investments, recovery of the individual consumption, improvement of the labour market, increase of the actual income and overall reduction of indebtedness”, Lyubomir Mitov pointed out. Thanks to the higher revenues in the budget, caused by cyclic factors, the governments of the CEE EU member states can afford to spend more or even reduce taxes. At the same time, the low inflation will enable most countries to continue with the non-restrictive monetary policy at least until the end of the year.

However, the growth of the economy remains weak in Turkey and almost unnoticeable in the Western Balkans. At the same time, Russia and Ukraine are still in recession as a result of the decrease in the prices of raw materials and their deteriorated geopolitical relations, as well as due to the sanctions imposed on the Russian state.

The economies of Serbia and Croatia will continue to be negatively influenced by the need of further consolidation of the public finances, the less attractive environment for investments and their lower level of integration with the economies of the Eurozone countries. The growth in Turkey will be weak in 2015, mainly due to the political insecurity, the increased instability of the markets, the reduced export due to the geopolitical tensions in the region and the fears that the country may be too vulnerable when the process of increasing the short-term interest rates starts in the USA at the end of the year.

“In the remaining part of the region, inflation may surprise with a movement in the upward direction in case the labour market remains stable and the decline in the prices of fuels and foods changes direction at the end of the year”, Lyubomir Mitov believes. According to his opinion, despite the overall favourable prospects many risks are still on the agenda, including the potential increase of the interest rates by the US Federal Reserve. This decision would affect everyone, but the countries from the EU and the CEE would be more stable as their microeconomic imbalances are minimal. The spread of the Ukrainian conflict and the possible exit of Greece from the Eurozone are among the other possible risks in the region.

What shall we expect in Bulgaria?

The economic team of UniCredit revised the forecast for GDP growth from 1.9% to 2.1% for this year and from 2.3 to 2.4% for 2016. The improved expectations for the economy are due to the following: acceleration of the export, the stronger-than-expected effect which the lower energy prices and the weaker euro had on the pace of the recovery process, and not least, the continuing improvement of the labour market. In an environment of compressed capital flows and limited possibilities for further loosening of the fiscal policy, the main engines of growth this year and the next one will be the stronger export, the gradual growth of the employment and the increased utilization of EU funds. What is more important is that the government finally undertook part of the painful measures which are necessary for the stabilization of the problematic energy sector, and that there is a significant probability that, at the end of this decade, Bulgaria may reduce to more manageable levels its excessive dependence on Russia as an only source of natural gas. Other positive news is that the revenues agencies were successful in limiting smuggling, which made it possible for the consolidated fiscal program to report a significant surplus for the January-May period.

Lyubomir Mitov believes that the significant acceleration of the Bulgarian export, which in real terms currently exceeds the pre-crisis peak with more than 40%, is grounded on solid bases. The impressive performance may, above all, be explained with the gradual addition of new production capacities in the processing industry, including in the pharmaceutical industry, the cosmetics, the manufacture of furniture and home appliances, but also with an accelerating pace of the manufacture of various components and parts for the automotive construction.

The increasing investments in the outsourcing of services and the international transport also supported the increase of export volumes. In addition, it seems that local exporters have managed to avail themselves to a greater extent of the current exclusively favourable external environment in comparison with the other competitors from the region of CEE and the Western Balkans. The lower prices of energy raw materials supported the Bulgarian export to a greater extent, because the economy has much higher energy intensity compared with the other CEE countries with which it competes for the same external markets. And not least, the more significant deflation pressure over the last year and prior to that led to a more favourable change of the production expenses in Bulgaria in comparison with the Eurozone countries as well as with those EU countries that have tied their national currency exchange rates to the euro.

All that shows that the prospects before the Bulgarian economy in the short and in the mid-term are improving due to at least two reasons. First, because the acceleration of the export is sustainable, and second, because the improved prospect for the export will also support the recovery of employment and income, because, as it seems, many export-oriented companies have reached the threshold at which the increase of production would require hiring of more employees and even an increase of the salaries at a faster pace.

Who is Lyubomir Mitov?

Lyubomir Mitov is the Chief Economist of UniCredit for Central and Eastern Europe as of March this year. He was Chief Economist for the developing European markets at the Institute for International Finance in Washington DC, where he has worked for 18 years. He has worked as Senior Economist at the World Bank Representation in Bulgaria and in the Ministry of Foreign Economic Relations. Lyubomir Mitov is a holder of a Ph.D. degree in International Relations from the Moscow State University. He can speak fluently English, Russian and German. He is the author of many research papers and economic analyses.

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