Bulgaria's economy slowed down in 2023 in sync with the trends of key trading partners. Inflation continues to slow, but the pace is slow and puts the country's bid to join the eurozone in 2025 at risk.
Real wage increases outpaced productivity growth in 2023, fueling concerns about competitiveness. The re-escalation of political uncertainty threatens the government's reform agenda. This is stated in a World Bank analysis quoted by Nova TV.
Basic conditions and challenges
Although Bulgaria is gradually approaching the average income in the EU, its development path remains uneven. By 2022, its GDP per capita reached 62.1 percent of the EU average per capita at purchasing power parity, but Bulgaria remains the poorest member state.
Furthermore, institutional and governance weaknesses continue to impede the country's faster growth and productivity development. Bulgaria managed to overcome the recent crises relatively well, not least thanks to timely fiscal support for households and businesses. Economic growth saw only a moderate decline in 2020, followed by a strong recovery in 2021-2022.
The fiscal position remained strong despite increased discretionary spending in response to the shocks. The final deficit did not exceed the 3 percent mark in any of the years of the crisis, and the public debt – at a projected 23.8 percent of GDP in 2023 – remains among the lowest in the EU.
In 2015-2020, Bulgaria's economic growth improved the living standards of the middle and poorest 40 percent of households. These improvements led to a significant reduction in poverty over the period by 9.6 percentage points (using the US$6.85 poverty line).
However, in 2021 this positive trend was reversed due to inflationary pressures and reduced employment rates among the unskilled. Comparatively, poverty levels remain relatively high by EU standards. Similarly, inequality in Bulgaria has been the highest in the EU for years, with a Gini coefficient of 40.8 in 2021.
Since the beginning of 2021, the country has suffered from political instability and lost the momentum of reforms. This was briefly interrupted by two short-lived regular governments that sought to increase efforts and meet key policy objectives, including milestones under the National Recovery and Resilience Plan. Yet renewed political turmoil threatens to throw the country back into the spiral of early elections with a reduced appetite for reform.
Recent Developments
Despite stagnation in some of the key export markets, the Bulgarian economy managed to hold its own thanks to strong private consumption. However, economic growth slowed to 1.8 percent in 2023 as strong household consumption (+5.4 percent) and a reduced contribution from negative net exports accompanied stagnant government consumption and a decline in gross capital formation. The latter fell 18.1 percent due to a reduction in inventories built up in 2021-2022 and likely caution by businesses to reinvest.
The slowdown in economic activity led to a moderate decline in employment in the second half of the year. Still, nominal wages continued to grow at a double-digit annual rate in 2023. Thus, real average wage growth approached 5 percent for 2023, outstripping labor productivity growth and fueling concerns about the country's competitiveness .
Consumer price growth continued to slow in 2023 to reach 3.8 percent year-on-year by January 2024. However, disinflation has been slow and average annual inflation reached a 15-year high of 9.5 percent in 2023. After a rapid deterioration in the fiscal position in early 2023, the balance sheet improved later in the year as measures to strengthen revenue collection paid off.
World Bank projections show the fiscal deficit reaching 2.4 percent of GDP in 2023, or below the Maastricht ceiling of 3 percent. The current EC report on Bulgaria's readiness to join the Eurozone is expected in June 2024.
For now, inflation remains the only challenging Maastricht criterion for accession, but the gap between actual inflation rates and the reference line is narrowing rapidly. Poverty reduction (using the $6.85 poverty line) will slow in 2023 to 5.12 percent, mostly due to slower economic growth and still high food and energy prices, which have adversely affected of those whose nominal wages do not keep pace with inflation.
The burden of energy costs varies across households due to different consumption patterns and energy needs, with single elderly households particularly affected.