GDP in Bulgaria is projected to grow by 1.9% in 2024 and 2.9% in 2025. Although private consumption growth is expected to moderate, domestic demand is set to remain the main growth driver. Exports are expected to expand robustly after 2024-Q1 in line with the recovery of external demand and imports are projected to rebound, led by domestic demand. The budget deficit is projected to reach 2.8% and 2.9% in 2024 and 2025, driven by expenditure on pensions and wages. General government debt is set to increase to 24.6% of GDP by 2025.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | 1.8 | 1.9 | 2.9 |
| Inflation (%, yoy) | 8.6 | 3.1 | 2.6 |
| Unemployment (%) | 4.3 | 4.3 | 4.0 |
| General government balance (% of GDP) | -1.9 | -2.8 | -2.9 |
| Gross public debt (% of GDP) | 23.1 | 24.8 | 24.6 |
| Current account balance (% of GDP) | -0.4 | 0.3 | -0.3 |
A gradual pick up of economic growth
Real GDP growth declined to 1.8% in 2023 mainly due to contracting exports and reduced accumulation of inventories. Private consumption grew strongly in the first half of the year and then slowed down, accompanied by a downward trend in confidence indicators in trade and services. At the same time, in 2023 household deposits increased by more than consumer credit, indicating higher propensity to save. Investment expanded, driven by purchases of new equipment. Imports of goods dropped sharply, due to the high import content of exports and inventories.
GDP growth is forecast at 1.9% in 2024 and 2.9% in 2025. Short-term indicators suggest that at the beginning of 2024 exports continued to contract and private consumption growth decelerated. Beyond 2024-Q1, exports are projected to rebound, driven by the recovery of external demand. Consumption growth is assumed to recover in the remainder of 2024 and in 2025, supported by the expected still favourable labour market situation, while private saving rates continue to increase. Investment is expected to continue to expand over the forecast horizon, supporting production capacity. Imports are set to rebound, in view of the normalised inventory accumulation and the import component of investment and consumption.
Wage moderation amidst a tight labour market
The labour market remains tight, as employment losses in the manufacturing sector are more than offset by employment gains in private and public services. After 2023-Q1 wage growth in key sectors, such as manufacturing and construction, as well as in trade, transport and accommodation services slowed down, as firms have striven to maintain cost competitiveness. Looking forward, wage growth is expected to settle at around 10%, close to the long-term average, as inflation pressures subside. In the context of a shrinking working age population and a tight labour market, new hires, including in the public sector, are set to draw on new entrants into the labour market and on those already employed.
Inflation to decline in line with external prices and domestic developments
HICP inflation continued to decelerate, averaging 8.6% in 2023 and falling to 3.1% y-o-y in March 2024. Energy and food prices had the largest contribution to the broad-based disinflation developments. The lower inflation outlook is supported by price expectations anchored by the projected aggregate wage moderation and by contained increases in import prices. The downward trend in external prices is expected to curb inflation of energy and non-energy industrial goods prices. The decision to reduce co-payments for certain medicines in late March also brings down the inflation rate for non-energy industrial goods. Services sector inflation is set to remain relatively strong, driven by increasing nominal wages in the sector and the expiration of the reduced VAT measure for restaurant and catering services.
General government deficit set to remain close to 3%
The deficit for 2023 was recorded at 1.9% of GDP, a marked decrease from the 2.9% of the previous year. This was in part due to the late adoption of the 2023 budget, which limited the spending capacity compared to the initially planned budget with an impact on intermediate consumption. It can additionally be attributed to the normalisation of energy prices contributing to a sharp decrease in subsidies (down by 46.7% from 2022). A positive impact also came from the introduction of a 100% dividend on state owned enterprises, with an estimated budgetary impact of 0.6% of GDP and from a package of measures to increase revenue collection, including in the area of fiscal control of goods with high fiscal risk, with an additional impact of 0.3% of GDP.
For 2024, the deficit is projected at 2.8% of GDP. In line with policy changes legislated in 2022, expenditure on pensions and wages is set to increase over the forecast horizon. Revenue increases only partly compensate the additional expenditure. Notably, revenue is expected to benefit from the discontinuation of a reduced VAT rate for several goods and services and from the introduction of a domestic top-up tax on multinationals. Projected increases in imports in 2024 would further increase revenues from indirect taxation. Deficit in 2024 is also affected by the expected complete phase-out of measures to mitigate the impact of high energy prices, estimated at 0.8% of GDP.
After a peak in 2023 due to the completion of projects financed by the European Structural and Investment Funds 2014-2020, public investment is set to decrease in 2024. Starting from a low level in 2023, some positive contribution is expected from the implementation of RRP investments, despite the severe delays.
In 2025, the deficit is forecast at 2.9% of GDP based on unchanged policies. Following changes in key income policy parameters such as minimum wage and insurable income thresholds, a somewhat steeper increase is expected in social contributions. Revenue is also supported by a generally positive macroeconomic outlook and in particular by favourable labour market developments. RRP implementation is set to increase moderately from the 2024 level and a positive impact on public investment is also expected from the accrual of military spending recorded upon delivery.
The general government debt-to-GDP ratio is forecast to increase from 23.1% in 2023 to 24.6% by 2025. Risks to the fiscal outlook of Bulgaria are still tilted to the downside, as permanent increases in wages and pensions are not fully compensated by structural measures that go beyond 2025.