03.01.2024

BNB'S AUTUMN FORECAST – BETWEEN OPTIMISM AND CONSERVATISM

Comment from the specialist

Teodor Nedev, Institute of Market Economy

After the autumn macroeconomic forecasts of the EC and the Ministry of Finance were recently published, the Bulgarian National Bank (BNB) also published its expectations for the development of the Bulgarian economy until 2025. This gives us the opportunity to compare the three available autumn forecasts - of the Ministry of Finance (published on October 27 and reporting data until middle of the same month), of the EC (published on November 15 and reporting data until the last days of October) and of the BNB (published on November 22 and reporting data until November 10).

While the EC's forecast for the growth of the Bulgarian economy emerges as more conservative, and that of the Ministry of Finance as more optimistic, the BNB's expectations are in the middle. The three forecasts converge on the expected GDP growth for 2023 – 2% according to the EC, 1.8% according to the Ministry of Finance and 1.9% according to the BNB. For 2024, the Ministry of Finance predicts the highest growth (3.2%), followed by the BNB (2.7%) and then the EC with 1.8%. For next year, the expectations are reversed, with the EC again being the most conservative with a projected growth of 2.6%, while the ministry expects 3% and the BNB – 3.6%.

The three forecasts do not differ much regarding the main factors for the dynamics of the economy in 2023. The BNB, like the MoF and the EC, expects GDP growth to be driven upwards by strong consumption and net exports (as here both imports and exports are shrinking, but the decline in imports is much stronger) and down from the sharp contraction in inventories.

The differences become more visible in the forecasts for the next two years. Like the MoF, the BNB has also demonstrated some optimism for the activation of investments, betting on capital formation growth of 9% for 2024 (at 4% according to the EC and 9.6% according to the MoF) and 10.1% for 2025 (at 3.3% according to the EC and 7.9% according to the MoF). It is important to note that the growth rates expected by the BNB for the coming years are close to those of the Ministry of Finance, but still, the central bank's forecast is somewhat more conservative, as it predicts a decline in investment in 2023. i.e. capital formation will grow against a reduced base. The BNB's forecast sees investments as a key driver of growth for the next two years and, just like the MoF, expects them to increase rapidly due to the implementation of projects under the National Recovery and Resilience Plan, which will subsequently strengthen private investment activity.

In private consumption, the BNB expects a growth of 3.7% and 4% respectively for the next two years against the background of the more modest 1.4% and 2.4% according to the EC's forecast. On the other hand, the BNB expects a much more modest growth in government spending of 1% and 2.1%, while the EC bets on growth of as much as 5.2% and 5.1% for 2024 and 2025. In its forecast, the Ministry of Finance does not breaks down private and public consumption, but overall both the BNB and the Ministry forecast a more stable growth of this component of GDP compared to the Commission, with the BNB betting that the factors behind this are the rise in real incomes (especially due to labor shortages as a result demographic trends), increased social transfers, higher health care costs and higher public sector wages.

However, the three forecasts are more unanimous on net exports, betting on a negative contribution to growth from this component. The forecast of the BNB predicts that exports will grow by 4.4% and 3.8% respectively in the next two years, while the Ministry of Finance bets on 4% and 4.1%, and the EC - on 4% and 2.6%. In parallel, all three institutions forecast stronger growth in imports - 6.2% and 5.4% according to the BNB, 6% and 5.8% according to the Ministry of Finance and 5.2% and 3.4% according to the EC. According to the BNB, the growth in exports will be largely due to the lowered base - the bank's forecast for 2023 foresees a contraction - as well as the fact that large-scale repair work will no longer be available at some of the largest energy and metallurgical enterprises in the country. The BNB also expects the negative shocks in external demand, caused mainly by the conflict in Ukraine and the general rise in interest rates, to be concentrated mainly in 2023, which will also allow for a sharp recovery of exports next year. However, even higher imports are projected over the two years, due to projected high levels of private consumption and investment, which will lead to more imports of both consumer goods and machinery and equipment.

Traditionally, macroeconomic forecasts also describe risks for their implementation and alternative scenarios, with the BNB and the MoF paying attention to the factors that could specifically negatively affect the Bulgarian economy. Both forecasts were published after the start of the current conflict between Israel and Hamas, but their baseline scenarios do not predict major upheaval along these lines. However, both the MoF and the BNB take into account the negative shocks that the conflict could cause, as well as other, not so recent risks arising from the war in Ukraine and higher interest rates.

The Treasury foresees an alternative scenario where, due to the uncertain international environment, the prices of oil, precious metals and food products are higher in 2024 and 2025 than the assumptions of the main forecast. This would further increase price levels, with which real household incomes would decrease and with them consumption. The ECB would be forced to raise interest rates to respond to price pressures, so the MoF also foresees an increase in EURIBOR compared to the baseline scenario. This, in turn, will make lending more expensive, which will further reduce both consumption and investment activity. Against the background of the above, the world economy would grow more slowly, which would reduce the demand for Bulgarian export goods and services, but this would be largely offset by lower imports, as a result of weaker household consumption. Under the specific assumptions, the MoF foresees GDP for 2024 and 2025 to be half a percentage point lower compared to its base forecast, and HIPC inflation to be 1.3 and 1.1 per cent, respectively higher. It is interesting to note that scenarios of a faster contraction in inflation and the potential effects on economic decisions and the fiscal have not been considered - and the sharp decline in the prices of oil and key agricultural commodities in the last month indicate that such a development is not out of the question.

The approach of the BNB is slightly different, as here the possible deviations from the base forecast are presented in the form of fan-shaped graphs, allowing for the possibility of a positive development of the forecasted indicators. For example, the BNB notes a scenario in which incomes grow more than expected, and the low propensity to save remains, with which consumption and GDP grow further. In general, the BNB takes into account the same external risks that the Ministry of Finance describes, but also mentions the possibility of the slow and incomplete implementation of the projects under the National Recovery and Resilience Plan in the next two years, which could reduce the growth in investments. At 60% probability, the fan charts report a possible range for 2023 GDP growth of 0.7% to 2.9%, while year-end inflation for 2023 could range from 4.4% to 7.9%.