Economic expansion is expected to slow down in the second half of 2022 and in 2023, before somewhat higher growth resumes in 2024. Price increases and higher borrowing costs are set to weigh on household consumption. Export growth is forecast to slow down, in line with the subdued foreign demand until the end of 2023 and then rebound in 2024. Increased EU funds absorption, notably of the RRF, is set to support aggregate investment. With inflation gradually slowing down, GDP growth is projected to accelerate from 1.1% in 2023 to 2.4% in 2024. The government deficit is forecast to decrease to 3.4% of GDP in 2022, as a large amount of the measures to mitigate the impact of high energy prices are offset by higher revenues, and to fall to 2.8% in 2023.
Last update (forecast)
|GDP growth (%, yoy)||7,6||3,1||1,1||2,4|
|Inflation (%, yoy)||2,8||12,8||7,4||3,2|
|General government balance (% of GDP)||-3,9||-3,4||-2,8||-2,5|
|Gross public debt (% of GDP)||23,9||22,5||23,6||25,6|
|Current account balance (% of GDP)||-0,5||-1,2||-3,0||-3,2|
Subdued domestic and foreign demand ahead
During the first half of the year GDP grew by 4% y-o-y, supported by strong export performance. Nevertheless, high inflation weighed on real disposable income and led to a deceleration in quarterly growth of household consumption to 0.5% in Q1 and 0.4% in Q2 2022. After a contraction of 8.3% in 2021, investment continued to decline in the first half of 2022, with non-residential contruction weighing on aggregate investment. Annual HICP inflation is expected to have peaked at 15.6% in September, as the effects from the energy and food price hikes gradually abate.
Overall, GDP growth is forecast to decelerate from 3.1% in 2022 to 1.1% in 2023 on account of lower domestic and foreign demand and then to pick up to 2.4% in 2024, as external conditions improve. Consumer sentiment deteriorated in 2022-Q3, indicating stagnation in household consumption by the end of the year. Household consumption is expected to remain subdued thorougout 2023 and then to pick up gradually in 2024, as inflation pressures abate. An important factor that is set to rein in private demand is the assumed higher interest rates in the next two years. Investment is projected to firm up due to higher absorption of EU funds, including the RRP. The dynamic growth in exports so far, is forecast to decelerate markedly in the second half of 2022 and in 2023 and then to accelerate moderately in 2024, broadly following external demand.
Labour market developents key to determine the path of the economy
The labour market remained tight, with seasonally adjusted unemployment at 4.6% in August. Nominal wages increased strongly at the beginning of the year, when salary updates are usually concentrated, followed by wage increases in the public and services sectors in the second quarter. Producers in manufacturing were able to accommodate the strong wage increases by keeping employment almost unchanged as production activity intensified. By contrast, high wages in the services sector have led to higher untit labour costs. The expected slowdown in both domestic and foreign demand dynamics, however, is set to supress hiring decisions and restrain further rapid wage increases. Wages are expected to grow by 9% in 2023 and 6.7% in 2024.
Inflation to decelerate gradually
Annual HICP inflation is set to come down from 12.8% in 2022 to 7.4% in 2023 and then settle at 3.2% in 2024. The labour market developments suggest that cost pressures in services are likely to lead to a further acceleration of price increases until the end of 2022, and then to gradually abate over 2023 and 2024. Food price inflation is expected to decelerate gradually and is set to be an important factor behind price dynamics in subcomponents like catering services. Energy price inflation is forecast to decelerate and turn negative in the second half of next year and then to remain negative in 2024.
Government deficit set to slowly decrease
The general government deficit is forecast to decrease to 3.4% of GDP in 2022 as the growth in revenue is projected to more than offset the growth in expenditure and to continue its downward path over the forecast period. Increasing prices of products and in particular of those subject to excise duties, as well as growing labour income, are the main drivers of the increases in tax revenue. Measures to mitigate the impact of high energy prices are expected to have a net budgetary effect of 2% of GDP in 2022 as they are partly financed by a levy imposed to the windfall revenues of enterprises in the energy sector and collected by the Electricity System Security Fund. Such measures are expected to continue in 2023.
The total cost of pandemic support measures is projected to fall from 3.8% of GDP in 2021 to less than 1% of GDP in 2022, and together with exceptional increases in wages of some categories of public sector personel are set to phase out as of 2023. At the same time, pension system amendments adopted in 2021 and 2022 and transfers related to the people fleeing Ukraine continue to weigh on public finances. Public investment is expected to increase, mainly supported by EU financing.
Until the adoption of a budget law for 2023, other expenditure items are going to follow the monthly execution of last year. In this context, the budget deficit is forecast to fall to 2.8% of GDP in 2023 and to 2.5% of GDP in 2024. Bulgaria’s general government debt is set to decrease to 22.5% of GDP in 2022 benefiting from large cash disbursements from the RRF, provided that all milestones and targets of the national RRP are satisfactorily fulfilled. Debt-to-GDP ratio is forecast to increase thereafter and reach 25.6% in 2024.