Economic growth is expected to slow down in 2023 and 2024 and then recover in 2025. After strong performance in 2022, exports are set to contract in 2023, due to subdued foreign demand, and rebound thereafter. Imports are also expected to contract sizeably in 2023, after expanding strongly in 2022. Household consumption is projected to temporarily stagnate in late 2023 and early 2024, and then resume a moderate expansion. Inflation is set to decelerate further, albeit at a slower pace. The government deficit is expected to slightly increase in 2023, driven by higher spending on increases in pensions and wages legislated in previous years.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | 2,0 | 1,8 | 2,6 |
| Inflation (%, yoy) | 8,8 | 4,0 | 2,9 |
| Unemployment (%) | 4,2 | 4,2 | 4,2 |
| General government balance (% of GDP) | -3,0 | -3,0 | -3,2 |
| Gross public debt (% of GDP) | 23,5 | 24,3 | 26,1 |
| Current account balance (% of GDP) | 0,7 | -0,3 | -0,9 |
Slower GDP growth ahead
Annual GDP growth declined from 3.8% in 2022 to 2.0 in the first half of 2023. Economic activity in Bulgaria was negatively affected by weak external demand, after buoyant exports in 2022. Private consumption contributed positively to growth in this period, due to the favourable labour market situation. The strong accumulation of inventories in 2021 and the first half of 2022 turned sharply negative in the second half of 2022, and the decline deepened in the first half of 2023. The volume of imported goods and services has also dropped steeply since the beginning of 2023, driven by the contraction in exports and inventories, demand components with high import content.
GDP is expected to grow at 2.0% in 2023, on the back of still strong private consumption and contracting imports. Output growth is forecast to slow down to 1.8% in 2024 and then to pick up to 2.6% in 2025. Towards the end of 2023 and the beginning of 2024, household spending is set to stagnate, affected by the projected increase in retail interest rates for households. Thereafter, private consumption is forecast to expand, albeit at a more moderate pace, in line with the projected lower wage increases. Exports are set to rebound by the end of 2023 and grow by 4.0% in 2024 and by 2.6% in 2025, reflecting the recovery in export markets. The base effect of strong exports in 2022, including notably electricity, negatively affects 2023 growth rates and is set to disappear afterwards. Gross fixed capital formation is expected to expand in the next two years, driven by public investment, including RRF funded projects. Inventories are set to contribute little to domestic demand over the forecast horizon. The shift of the source of growth to exports, which are import-intensive, is expected to drive imports upwards.
Risks to the macroeconomic outlook are broadly balanced. On the one hand, a tighter labour market, combined with a slower pass-through of the tightened monetary conditions abroad to the domestic economy, poses a risk to the economy growing above potential. On the other hand, delays in absorbing EU funds and implementing the Bulgarian RRP would bring about more subdued growth prospects.
Gradual easing of wage cost pressures
Overall, the labour market remains tight with an unemployment rate of 4.5% in August 2023, but there are some signs of exhaustion of further employment gains. The unemployment rate has increased by 0.5 pps. since the trough in January 2023, while new hires have dropped by 12% in the first seven months of 2023, compared to a year earlier. After nominal wages increased sharply since mid-2022, to keep pace with accumulated inflation, wage growth moderated in the first half of 2023, as inflation also gradually came down. This trend is expected to continue over the forecast horizon, gradually easing wage cost pressures.
Inflation to decelerate, albeit at a slower pace
Annual HICP inflation declined from 14.3% at the end of 2022 to 6.4% in September 2023 with all components decelerating. The strongest contribution came from energy and food prices, the same components that drove the inflation up in 2022. Over the forecast horizon, inflation is expected to decelerate less sharply, given the diminishing base effects from 2022, the recent increase in international oil prices and the more persistent inflation in services. Annual inflation is set to come down to 8.8% in 2023 and then decelerate further to 4.0% in 2024 and 2.9% in 2025.
Moderately increased general government deficit
After the deficit narrowed to 2.9% of GDP in 2022, it is projected to slightly increase to 3.0% in 2023. The government adopted increases in wages and pensions in previous years and these will have a budgetary cost of around 4% of GDP in 2023. Their impact is mitigated amongst others by compensatory measures increasing tax collection and setting a 100% dividend for SOEs. At the same time, other developments have contributed to contain the deficit such as the partial phasing out of the measures to moderate the impact of high energy prices, while those remaining in 2023 are fully financed by a solidarity contribution from the energy sector. As a result, the total (net) budgetary cost of energy-related measures is forecast at 0.8% of GDP for 2023. Revenue has also benefitted from tax-rich income increases and higher consumption and rising prices.
In 2024, the general government deficit is forecast to remain at 3.0% of GDP. Tax revenue increases are set to slow down in line with the economic outlook, but some positive effect is expected from measures to support collection and from the full phasing out of the energy-related measures. Public investment is expected to remain broadly stable, but the expected impact on the deficit is set to be contained thanks to higher revenue from the EU, in particular the RRF. In 2025, the deficit is projected at 3.2% of GDP, mainly affected by the delivery of military equipment with a total temporary cost close to 0.7% of GDP.
The general government debt-to-GDP ratio is forecast to increase from 22.6% in 2022 to 26.1% by 2025. Risks to the fiscal outlook of Bulgaria are tilted to the downside, as recent permanent increases in wages and pensions remain to be fully compensated beyond 2023.