Bulgaria: Country Economic Forecast: 10 May 2012

We have lowered our forecast for Bulgaria and now expect GDP growth to slow to 0.7% in 2012 (from 1.3% previously). This revision reflects weaker demand in the Eurozone, the main trading partner, which has resulted in disappointing export data at the beginning of this year. Domestic demand also remains subdued. Unemployment has risen significantly over the past year and, together with the uncertainty surrounding the fragile recovery, this has undermined confidence and led to delays in spending, plus consumer de-leveraging. Investment, which prior to the financial crisis provided a large positive stimulus to growth, is expected to fall for the fourth consecutive year in 2012. Worries about the state of both the Bulgarian and wider European economies have dampened firms'willingness to invest and are deterring FDI inflows. Although oil prices have eased from the highs seen in March, we expect CPI inflation to accelerate during this year as pre-announced energy price rises come into effect and helpful base effects drop out of the annual comparison. This is likely to weigh on both private consumption and GDP growth. Bulgaria's fiscal position remains one of the strongest in the EU. But the impact of slower than expected growth on revenues could make the government's 2012 deficit target of 1.3% of GDP difficult to achieve.