01.03.2023

EC FORECASTS FOR BULGARIA: GDP GROWTH OF 1.4% AND INFLATION OF 7.8% FOR 2023

Despite high inflation, economic activity continued to expand in 2022, supported by robust export growth and increases in wages and social transfers that offset rising consumer prices. Still, private consumption growth slowed in the first half of the year as inflation picked up. However, consumer demand is assumed to have strengthened in the second half of 2022 due to continued growth in disposable income combined with some slowdown in monthly inflation dynamics. This is recorded in the winter forecast for 2023 of the European Commission for Bulgaria.

The downward trend in fixed capital investment that began in 2021 has continued in 2022. Rising prices of capital goods, both in construction and equipment, are likely to have dampened new investment. Overall, the European Commission expects real gross domestic product (GDP) to have increased by 3.9% in 2022.

Real GDP is expected to grow by 1.4% in 2023 and by 2.5% in 2024.

The path of the economy is expected to depend largely on the interaction between wage growth and prices. Short-term indicators and inflation data suggest that inflation will decline only gradually over the forecast horizon as service price inflation continues. In a tight labor market, wages are expected to continue to grow strongly and support household consumption. The rapid increase in exports in 2022 was supported by the opportunity to meet supply shortages of food products, metals and other materials caused, among other things, by Russia's war of aggression against Ukraine.

Export growth is forecast to slow significantly in 2023, given that the drivers for further expansion of export market share were largely exhausted in 2022. In 2024, exports are expected to pick up in line with external demand. Increased absorption of EU funds, in particular the Recovery and Resilience Plan, is expected to support aggregate investment in both 2023 and 2024. Potential delays in the implementation of the Recovery and Resilience Plan pose a downside risk to investment growth.

Average inflation according to the Harmonized Index of Consumer Prices (according to Eurostat standards)

reached 13% y/y in 2022 with a strong contribution from energy and food price inflation. Service price dynamics are driven by transportation and restaurant services that rely on energy and/or food as direct inputs. Towards the end of the year, inflation spread to other services in line with rising unit labor costs. Overall, Harmonized Index of Consumer Prices inflation is expected to ease from 13% in 2022 to 7.8% in 2023 due to lower energy prices. In 2024, headline inflation is expected to slow further to 4% as food price dynamics weaken. Service price inflation is expected to persist over the forecast horizon.

Compared to the autumn forecast

The European Commission raises its GDP growth expectations from 1.1% in the autumn forecast to 1.4% in the winter forecast, and for inflation, it forecasts an increase in consumer prices from 7.4% to 7.8% in 2023.