15.07.2022

BNB: PRICES WILL RISE UNTIL 2023, BUT WAGES WILL OUTPACE THIS GROWTH

Income growth higher than inflation until the end of the year, the Bulgarian National Bank (BNB) predicts in its new forecast. The reason for this, according to experts, is the shortage of qualified workers, which will pressure the private sector to raise wages.

Income growth will accelerate by 14.3% in 2022, with a faster rate of rise relative to inflation expected to support real household disposable income, the document said.

This gap will close in 2023, for which the BNB expects wages to rise twice as slowly – by 6.5%, and for 2024 the increase will be slightly larger – up to 7.5%. Unemployment in our country is expected to reach 4.7% in 2022 and decrease to 4.3% in 2024.

However, the BNB lowered, and sharply, its forecast for the growth of the Bulgarian economy in 2022 - to 1.9% compared to the 2.1% expected in March. The arguments - slower GDP growth is determined by the expansion of the negative contribution of net exports, which will only be partially offset by the expected acceleration of domestic demand.

The central bank's expectations are much more pessimistic than those three months ago for economic growth until 2024. For next year, it is expected to be no higher than 1.7% instead of the 3.9% predicted in March. It looks a little more optimistic in 2024 – 3.7%.

Inflation will move in the opposite direction, the BNB predicts - by the end of the year it will accelerate to 14.7%, and not as expected in March - to 9.6%, the reason will be the increase in the price of all goods and services. It is only in 2023 and 2024 that inflation is expected to slow down to 3.8 and 3.1%, respectively, due to the then expected calming down of the prices of energy raw materials on international markets and the significant slowdown in food price increases.

A deficit of 1.1% of GDP in 2022, an increase to 1.3% in 2023 and a contraction to 0.5% in 2024 are also forecast by the central bank.

A slight slowdown in the growth of loans at the end of 2022 - to 8.4%, but the preservation of strong interest in mortgage loans, despite the expectations of an increase in interest rates, is also predicted by the BNB. The reasons are the significant acceleration of inflation and the remaining negative real interest rates on housing loans, together with the still negative level of interest rates on deposits.

However, for 2023, when interest rate hikes and inflation easing are expected to be felt, the forecast is for a more substantial slowdown in the growth of both household loans and loans to non-financial enterprises. In 2024, the forecast points to a slight acceleration of lending.

Deposits are expected to continue to grow at a high rate over the forecast period thanks to wage growth and a projected increase in interest rates on deposits. The rates remain roughly the same – around 9%.

As potential risks to the forecast, the central bankers point to even lower GDP growth throughout the forecast period, i.e. until 2024, due to the possibility of further deterioration of the international situation and shortage of energy raw materials in Bulgaria and the main trading partners On the side.

Political uncertainty, which will affect investment activity in Bulgaria, is considered a risk for the forecast. This may lead to slower absorption of funds under European programs and delayed implementation of investment projects under the National Plan for Recovery and Sustainability.

There are also risks of higher inflation due to the difficulty of predicting the dynamics of raw material prices on international markets. The incomplete transfer of the zero VAT for the supply of bread and flour to final consumer prices, as well as the compensation for fuel prices, may also reduce the realism of the forecast, the BNB notes.

The EC appears to be a little more optimistic about the Bulgarian economy. The economic growth of Bulgaria in 2022 will be within 2.8%, according to the summer forecast of Brussels. According to them, this year the growth of the gross domestic product will accelerate by 0.7 percentage points compared to their spring forecast, but in 2023 there will be a slowdown to 2.3%, which is 0.8 percentage points lower than the spring expectations.

The EU sees arguments for these expectations in the strong recovery of the Bulgarian economy in the first quarter of next year, which they expect to continue. However, the worsening external environment, tight credit conditions and slow real wage growth will drag down the forecast for 2023.

Brussels expects inflation in Bulgaria to reach a level of 12.5% ​​in 2022, and to calm down to a single-digit level of 6.8% in 2023. The development of the entire European Union is under the influence of the war in Ukraine, the EC notes. The expectations for this year are that the GDP of the community will increase by 2.7%, but in 2023 it will decrease almost twice - about 1.5%. For the Eurozone, GDP growth in 2022 will be 2.6%, and next year it will slow significantly to 1.4%.