OECD sees Bulgaria’s economic growth slowing in 2023, regaining speed in 2024

Bulgaria’s economic growth is projected to slow to 1.9 per cent in 2023 due to global headwinds, including the slowdown in Bulgaria’s main trading partners, but then rebound to 3.2 per cent in 2024, the Organisation for Economic Cooperation and Development (OECD) said in its June 2023 Economic Outlook.

Private consumption growth will slow in line with lower employment growth, the OECD said.

The disbursement of EU funds was delayed in 2022, but is expected to catch up to a large extent in 2023, the report said.

Inflation is expected to moderate in 2023 and in 2024, but there are risks from high wage increases, it said.

Due to high inflation and political instability, which delayed several important legislative packages, Bulgaria postponed the target date for euro area entry to 2025.

Most energy-related fiscal measures will continue, financed from large windfall revenues of the large electricity companies but should be better targeted and designed.

Bulgaria’s unemployment rate is low, but there are persistent labour shortages.

“Migration and activation policies need to be stepped up to encourage emigrants to return and to ensure that those with work capacity join the labour market. Upskilling the population is crucial to foster growth and further improve living standards,” the report said.

Bulgaria’s economy performed well in 2022 with real GDP growth reaching 3.4 per cent on the back of increased household consumption and exports including electricity, while gross fixed capital formation remained subdued, the OECD said.

In the first quarter of 2023 annual growth slowed to two per cent due to a moderation in final consumption and exports.

“The impact from Russia’s war of aggression against Ukraine came mainly through the surge of global energy and commodity prices,” the OECD said.

“Even though most of the energy supply comes from domestically produced coal and nuclear energy, interconnection with neighbouring countries drove up electricity prices.”

Reliance on Russian gas was more limited than in many other countries. With the exception of nuclear fuel and oil, Bulgaria had modest trade links with Russia.

Headline inflation started to come down in late 2022 following moderation of international energy and commodity prices, and eased to 10.3 per cent in April.

Labour markets have remained resilient with rising employment and a low unemployment rate, and nominal wages have increased at a rapid pace.

Industrial production began to slow in August 2022 and in the first quarter of 2023 was lower than a year earlier.

The decline in production was broad-based, including in mining and quarrying, electricity and gas supply, and manufacturing of food, textiles, basic metals and chemical products.

As a small open economy trading mainly with other EU countries, Bulgaria is being affected by the slower growth of export demand, the OECD said.

Prolonged political instability has delayed key policy reforms, the report said.

“More effective management and roll-out of EU funds would support activity going forward.”

Currently Bulgaria is under a specific derogation from the EU ban on the import of Russian crude oil, and the export of oil products has not yet been affected.

Migrant flows from Ukraine remain small and difficult to retain in the country and integrate in the labour market, the OECD said.

The global surge in energy and food prices in 2022 has pushed inflation to levels not seen in decades.

Interest rates have increased in line with those in the euro area as part of the currency board arrangement.

Broad-based fiscal support measures are continuing in 2023. These include compensation to companies

that are electricity end-users and to electricity distribution companies for technological costs, as well as a lower VAT rate for natural gas and central heating and a zero rate for bread and flour.

Significant increases in pensions, child allowances and the minimum wage last year continue to support spending.

A new government has yet to be formed and new budget policies have not yet been set out, but the aim is to keep the deficit in 2023 below the three per cent ceiling in the EU fiscal rules, said the report, which was compiled before Bulgaria’s National Assembly elected the Nikolai Denkov government on June 6.

The projections assume that the overall fiscal stance is broadly neutral in both 2023 and 2024.

“Growth will regain speed in 2024 driven by a projected pick-up in export demand, and by public and private investments supported by EU funds,” the OECD said.

The disbursement of EU funds has been delayed, but is expected to accelerate in 2023 and 2024, lifting GDP growth to 3.2 per cent in 2024.

Higher long-term interest rate on government bonds will weigh on activity.

Headline inflation will slow to around 9.5 per cent in 2023 and 4.4 per cent in 2024.

The labour market will remain resilient with only a marginal increase in unemployment in 2023, while nominal wage growth is expected to decline gradually in line with the inflation rate.

A further deterioration in financing conditions would hold back private investment, including from abroad.

“Political uncertainty still places planned reforms and investments at risk.”

Effective management of EU funds is key for sustaining activity and boosting potential growth, the report said.

Strengthening the convergence process requires pursuing and deepening reforms to encourage and intensify investments in infrastructure, reduce administrative burdens and strengthen efforts to fight corruption.

Rising spending pressures related to ageing, infrastructure and skills will need to be financed while energy support measures should be more targeted and gradually phased out, the OECD said.

“Better policies are needed to encourage people to stay in Bulgaria and encourage emigrants to return.”

While the share of women in management positions is high and the measured gender wage gap is low, many women are engaged in caregiving of children or the elderly and are out of the labour force.

“Childcare and elderly care should be expanded, including through enhanced training of professionals, to allow family members to participate in the labour market and to meet demand from the rapid ageing of the population.”

Energy security is currently ensured, but the decarbonisation of the economy will require considerable efforts going forward, the OECD said.

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