site.btaUPDATED Bulgaria in European Autumn Economic Forecast: Economic Expansion to Slow Down in 2023, Higher Growth Returns in 2024

Economic expansion is expected to slow down in the second half of 2022 and in 2023, before higher growth resumes in 2024, the European Commission writes of Bulgaria in its autumn economic forecast for the European economy released Friday. 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.

The EC expects that increased EU funds absorption, especially of recovery and resilience funding, will support aggregate investment. Inflation is projected to gradually slow down and GDP growth to accelerate from 1.6% in 2023 to 2.5% in 2024. The government deficit is forecast to decrease to 3.4% of GDP in 2022 and further to 2.6% in 2023.

Here is what else the European Economic Forecast says of Bulgaria:

Annual Harmonised Index of Consumer Prices (HICP) inflation is expected to have peaked at 15.6% in September, as the effects from the energy and food price hikes gradually abate. 

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.

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.

On the labour market, following unemployment of 4.6% in August and strong wage increases in the public, the services and manufacturing sectors, the expected slowdown in both domestic and foreign demand dynamics, is projected to supress hiring decisions and restrain further rapid wage increases. Wages are expected to grow by 9% in 2023 and 6.7% in 2024.

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 Recovery and Resilience Facility, provided that all milestones and targets of the national recovery plan are satisfactorily fulfilled. Debt-to-GDP ratio is forecast to increase thereafter and reach 25.6% in 2024.