Economic Policy Review ISSN 1313 - 0544

The Improving GDP Forecasts: A Comment

Author: IME / 24.04.2010
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While waiting for the express assessment of the National Statistics Institute for GDP growth for the fourth quarter of 2009, more and more organizations and independent analysts update their forecasts about economic growth for Bulgaria for 2009 and 2010. While in the fall of 2009 the forecasts were for a 6-7% drop in GDP for the current year and 1.5-2.5% for 2010, now the expectations have sharply risen.

Forecasts were updated generally for most of the countries in Central and Eastern Europe due to weaker-than-expected effect of the crisis. The last statistical data creates positive expectations for Bulgaria too - goods export marks its first (though weak) growth in November 2009 on yearly basis, reduction in industrial production gradually slowed down in November 2009, expectations in manufacturing had risen in January this year.

According to the last expert assessments (the table below) the GDP reduction in 2009 neared 5% while the calculations vary in a relatively narrow interval of -4.7% to -5.2%. At the same time, the analysts dare to forecast weak but positive economic growth for the current year (see the table below).

GDP Growth forecasts for Bulgaria 2009-2010 (%)

 

Old forecast

New forecast

 

2009

2010

2009

2010

IMF*

-7

-2,5

-6,5

-2,5

EBRD

-6

-1,5

-4,8

0

Ministry of
Finance

-6,3

-2

-4,9

0,3

Raiffeisen
 Bank

n.d.

n.d

-5

0

UniCredit
Bank

-6,3

-2,5

-5,2

-1,5

Institute for
Market
Economics

-6,5

-1,8

-5,1

0,5

Source: IME

* Currently the International Monetary Fund has revised its forecasts for the region including Bulgaria and further improvement in the numbers is expected.

These revisions made by serious international organizations and observers such as the IMF, EBRD, etc., generate positive expectations amongst the business and the consumers. This, in turn, influences economic agents' actions regarding their business plans, investments and consumption, and accelerates the process of economic recovery. In other words we could observe a process of the so-called "self-fulfilling expectations", according to which the accumulation of more and better expectations for the economy could only help in its early exit from the crisis. On the other hand, the improved expectations would have its direct effect on the budget implementation this year. While the assumptions of the prebudget report for 2010 sets negative GDP growth of 6.3% and 2% for 2009 and 2010 respectively, a better performance for the economy would automatically generate more budget income. The increased revenue can be used in several ways:

1/ to shrink the planned consolidated budget deficit of 0.7%;

2/ to plan a further cut in the tax burden if the extra income allows that;

3/ to increase the budget expenditure in the last months of the year.

The last option is the most tempting and least productive. This is particularly valid when such additional expenditure is directed in a traditionally untransparent manner to  unreformed sectors or projects with questionable effect. On the other hand, further reduction in the set budget deficit could serve as a strong argument for our addmition  to the eurozone waiting room, Exchange Rate Mechanism II. As for the tax burden, its reduction during a crisis or recovery (if the revenue allows that) would leave more resources available to companies and citizens, which will generate consumption and investment and will provide additional incentive to recover from the crisis.