The European Commission Upgrades Economic Outlook for Bulgaria - Feb 13th, 2023

In its latest macroeconomic report the European Commission upgrades the economic outlook for Bulgaria. The report states that despite high inflation, economic activity continued to expand in 2022, supported by robust growth in exports and by wage and social transfer increases that compensated for increasing consumer prices. Still, private consumption growth decelerated in the first half of the year as inflation gathered pace. However, consumer demand is assumed to have firmed up in the second half of 2022 due to continued growth in disposable income, combined with some moderation in month-on-month inflation dynamics. The downward trend in fixed capital investment that started in 2021 persisted in 2022. Growing prices of investment goods, both in construction and equipment, have likely supressed new investment. Overall, real GDP is estimated to have increased by 3.9% in 2022.

The report states that Real GDP is expected to increase by 1.4% in 2023 and by 2.5% in 2024. The path of the economy is expected to largely depend on the interplay between wage and price developments. The short-term indicators and inflation figures suggest that inflation is set to decrease only gradually over the forecast horizon, as services price inflation is set to persist. In the context of a tight labour market, wages are expected to continue to grow strongly and to sustain household consumption. Rapid export growth in 2022 was underpinned by the possibility to satisfy supply shortages of food, metal and other materials products, caused inter alia by the Russia war of aggression against Ukraine. Export growth is forecast to slow down considerably in 2023 given that the factors for further gains in export market share were largely exhausted in 2022. In 2024, exports are expected to grow in line with external demand. Increased EU funds absorption, notably of the RRF, is set to support aggregate investment in both 2023 and 2024. Potential delays in RRP implementation constitute a downside risk to investment growth.

Finally, the report commented the inflation dynamic stating that average HICP inflation reached 13% y-o-y in 2022, with a strong contribution from energy and food price inflation. The dynamics in services’ prices was driven by transport and restaurant services that rely on energy and/or food as direct inputs. Towards the end of the year, inflation also spread to other services, in line with increasing unit labour costs. Overall, HICP inflation is set to decline from 13% in 2022 to 7.8% in 2023 on account of lower energy prices. In 2024, headline inflation is set to decelerate further to 4%, as food price dynamics abate. Services price inflation is set to persist over the forecast horizon. Source: https://economy-finance.ec.europa.eu/economic-surveillance-eu-economies/bulgaria