As the IMF say in their most recent staff report on the country, the aftermath of the recent severe economic crisis leaves us with the question as to whether potential output growth in Bulgaria in the years to come is going to be markedly lower than it was during the boom years. As the IMF point out, the current recession was preceded by an investment boom in construction, real estate and the associated financial sectors. Now that the boom (which was always unsustainable, Bulgaria's current account deficit in 2007 hit almost 27% of GDP) is well and truly over in these sectors, the strong associated decline in investment could have large negative effects on output. Moreover, it will take considerable time before the excess labor and resources that are no longer needed in these sectors can be absorbed by other sectors, which suggests that the rate of unemployment may rise yet further and remain higher for some considerable time. Not a uniquely Bulgarian story, but none the less important for that.
Following several years of strong increases (around 6% a year) Bulgarian growth declined sharply in 2009 when the economy was hit hard by credit squeeze which formed part of the global economic and financial crisis.
Capital inflows, which had been keeping the current account deficit afloat, dropped from a peak of 44 percent of GDP in 2007 to less than 10 percent of GDP in 2009. As a result, investment, which had risen by over 20 percent annually during the previous two years, fell by nearly 30%. And as the investment flows dried up, the Current Account deficit closed rapidly, as imports (and domestic consumption) dropped back sharply.
Employment also started to fall, while the unemployment rate rose rapidly, hitting a seasonally adjusted 9% in March and April this year, according to Eurostat seasonally adjusted data.
The question the IMF ask, about whether Bulgaria will be able to return to the high growth rates of 2001–08 is no idle one, since with a shrinking and ageing population, and an external debt which stands at around 110% of GDP, sustainability in the medium term means finding a level of growth which can enable to country to pay down its debt and support its pension and health systems.
And this will be no easy task, given that the early strong revenue flows from domestic consumption (VAT) have now fallen sharply and are unlikely to rebound as the country becomes increasingly export dependent for growth, and exports don't have VAT attached. Again, this isn't only a Bulgarian problem, but it is there as an issue.
France cuts the 2011 economic growth forecast to 2%
France cuts the forecast for 2011 economic growth, from the previous forecast of 2.5% to 2%, according to a statement made by President Nicolas Sarkozy.
Following a meeting between the President and the finance ministers, the President’s office released an emailed statement on the economic growth forecast, saying that the country will expand with a growth rate meeting or exceeding 1.4% in the next year.
The statement also said, regardless of the level of economic growth, the major objective of the country remains the reduction of government deficit from 8% in 2010 to 6% in 2011. This is the biggest deficit cut in the last two decades, since at least 1991. To fulfil the EU limit of 3% deficit by 2013, France would have to increase saving by 100 billion Euro.
To reduce the deficit, the president said the public expenditure would be reduced. Meanwhile, VAT, income tax or tax on companies would not be increased.
However, some economists think the government’s forecast is way too optimistic. The International Monetary Fund (IMF) predicts France would experience an economic growth of 1.6%. Gilles Moec from Deutsche Bank predicts the French economy would grow nearer 1% in 2011,”I think it’s still quite ambitious,” he said.
Some believes the French government is to reassure its European partners that the country is serious with the deficit cuts measures. “This is a much more realistic view and it means now we’ll see whether the government is really ready to make the necessary budgetary effort,” Jean-Christophe Caffet, an economist from Natixis Bank in Paris said