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By Tsvetelia Ilieva
SOFIA, Feb 16 (Reuters) - Bulgaria's economic growth nearly halved to an annual 3.6 percent in the fourth quarter of 2008, confirming a grim outlook for this year with some analysts saying a recession was on the cards.
The global economic downturn and contraction in the European Union -- Bulgaria's key export destination -- hit industrial production, trade and domestic demand in the fourth quarter, preliminary statistics office data showed on Monday.
The EU newcomer's growth was 6.8 percent in the third quarter and a real 6.9 percent in the same period of 2007.
The crisis has already hit most of eastern Europe and fourth quarter data last week showed that Hungary had entered recession, the Czech and Estonian economies shrank and Slovak growth slowed sharply.
Bulgaria's full year growth, however, stayed strong at a preliminary 6.0 percent from 6.2 percent in 2007 on the back of a good performance in the first half of the year, the statistics office's flash estimate showed.
But the global crisis is set to curtail Bulgaria's strong growth record from the past decade and analysts see growth plunging to between 0-2 percent this year from over 6 percent annually in the last 4-5 years. Some project a recession.
"The (Q4) slowdown is dramatic, said Lars Christensen, an emerging market analyst with Danske Bank. "Private consumption and investment will really, really slow down and we are most likely headed to a negative growth for the whole of 2009".
Bulgarian exports fell 6.8 percent in the fourth quarter from a 3.8 percent rise in the previous three months.
The preliminary data showed consumption growth, which has been the key driver of economic growth in past years, slowed to 2.8 percent in the fourth quarter from 5.4 percent in the third quarter as banks curbed lending.
The industry shrank 0.1 percent from October to December from a 2.1 percent increase in the previous quarter, while growth of services halved to 3.2 percent from 6.4 percent in the third quarter.
Investment more than halved to 9.7 percent in the fourth quarter from 22.3 percent in the third quarter.
The prospects of plummeting growth across central and east Europe have scared investors away and deepened a severe selloff in markets previously buoyed by the swift growth in the region's cheap manufacturing and service sectors.
Bulgaria's emerging economy has thrived in the past decade on the back of strong foreign investment, credit expansion and consumer demand. But this came at the expense of huge dependence on foreign cash to fund a bloated current account deficit.
Analysts say the economic slowdown and the external deficit at 24.3 percent of GDP last year increase pressure on Bulgaria's currency board regime and euro peg.
"The pressure is mounting on the currency board and soon the country is going to be visibly exposed. The fiscal buffers will erode quickly and the huge external exposure is a major risk," Gabor Ambrus, an analyst with 4Cast, wrote in a note.
Bulgaria pegged its lev to the euro in a currency straightjacket, which significantly curtails central bank operations leaving fiscal policy as its key tool to influence the economy.
The Socialist-led government targets a fiscal surplus of 3 percent this year to counter the external risks.