Despite the robust economic activity and its resilience to the deterioration in the global economy, the worsening external conditions are expected to have an impact on Bulgaria, the European Commission says in its forecast on the Bulgarian economy, BTA reported. The document is part of the autumn economic forecast for the EU member states released by the European Commission on Monday.

The autumn economic forecasts update the outlook for the period 2008-2010 for the EU and Euro area aggregates. In the abstract to the document, the European Commission says that the economy "is expected to come to a virtual stand-still in both the EU and the euro area in 2009". The authors believe that this downturn will help ease inflationary pressures as oil prices come down and the risks of second-round effects diminish. They say that but both labour markets and public finances are set to deteriorate, and note that all forecasts are "surrounded by considerable uncertainty at the current juncture and downside risks prevail".

In Bulgaria, real GDP growth is expected to decrease from 6.5% in 2008 to 4.5% in 2009. Growing risk aversion among foreign investors could result in a more significant deceleration in capital inflows and investment than assumed, while rising interest rates and persistently high inflation may additionally dampen real disposable income and private consumption, the document says.

Private consumption expenditure is expected to slow from 5% in 2008 to about 4.5% in 2009, while public consumption expenditure growth will be further boosted by additional current spending in 2008, reaching around 4%.

After a brief recovery of export growth in 2008, exports are expected to decelerate in 2009 as a result of lower external demand, followed by a partial upward correction in 2010, as industrial restructuring and the large foreign investment stock affect the country's export potential.

Due to weaker domestic demand, import growth is expected to decelerate from 9% in 2008 to around 6.25% in 2009.

The trade deficit is expected to narrow only gradually in 2008-2010, inducing a small reduction of the very high current account deficit to about 21.5% of GDP from a level of slightly over 24% of GDP in the second half of 2008.

With the employment rate expected to reach almost 64% in 2008, increases in 2009- 2010 are expected to be of a smaller magnitude. The unemployment rate will maintain its downward trend, falling below 6% in 2009.

Having accelerated to above 20% in 2008, nominal wage growth is expected to remain high during the forecast period. However, it may slow down as a result of weaker labor demand due to increased wage costs and the economic slow-down in the next two years.

Labor productivity is expected to increase from around 3% in 2008 and 2009 to almost 3.5% in 2010, well below wage growth. As a result, nominal unit labor costs developments will continue to reflect a persistent deterioration of price competitiveness compared with the EU average.

The imminent global economic downturn and the resulting fall in domestic demand could potentially slow inflation to below 8% in 2009, followed by a further deceleration in 2010. However, future developments in commodity prices and the capacity to contain second-round effects remain crucial to the inflation outlook, the report says.

Having noted the better-than-targeted surplus of around 3.25% of GDP, the report warns of possible slippages with regard to the official targets on the expenditure side, in the wake of approval of additional social and infrastructure spending.

The general government gross debt is expected to drop well below 10% of GDP by the end of 2010.