On Thursday last week the Ministry of Finance published its autumn macroeconomic forecast. According to its estimates, the Bulgarian economy is expected to expand by 2.8% next year, following growth of 2.2% this year. Accelerated growth will come thanks to higher public spending, while private consumption will slow down. The document is important because it will underpin the estimates for the draft budget.
According to the forecast, Bulgaria's gross domestic product (GDP) in 2025 will exceed 215 billion levs, while this year it is expected to reach nearly 201.5 billion levs. In practice, this means that if the state wants to achieve a deficit of up to 3% of GDP, it will have to plan the budget so that spending does not exceed revenues by more than 6.5 billion levs. Also, if the nominal growth of the economy this year was 8.8%, next year it is expected to be 6.8%, as inflation is also slowing down. This means there will be less room to increase spending than in the last 2-3 years, when high inflation and wage growth helped raise more revenue.
State-driven growth
Wage growth next year will slow to 9.1% compared to 14.3% this year, the forecast said. With the minimum wage rising from the start of 2025 and public sector pay rises already planned for next year, the state will effectively be driving income growth, the ministry's forecast claims. The question, however, is whether it can afford such increases without additionally burdening taxpayers. From the statements of Finance Minister Lyudmila Petkova it became clear that the caretaker cabinet plans to introduce new taxes and that the maximum social security threshold will be increased again, likely by 380 levs to 4130 levs.
Slower income growth will also limit consumption growth, which is currently the main driver of the economy. Thus, the acceleration of GDP growth to 2.8% is expected to be driven by higher public spending. Meanwhile, exports should gradually start to recover as a result of stronger external demand from the EU, but their net contribution to GDP growth will remain negative.
While the forecast relies on strong public investment, there is a risk that this will not materialise. Especially insofar as they depend on the Recovery Plan funds, of which Bulgaria is about to lose 1.2 billion levs under the second tranche as it delays the adoption of necessary reforms. In addition to the uncertain external environment, the main internal risk identified in the forecast is precisely public capital expenditure, including that under the plan. "Its non-performance would be reflected in lower-than-expected growth of the economy in the period 2024-2026," the forecast warns.
The document highlights another risk - political instability. "Domestic political instability and changes in administratively determined labor market indicators (most notably public sector wage indexation and the minimum wage) create expectations and attitudes for continued high wage growth rates in the coming years despite slowing inflationary processes," the ministry analysts write. This could lead to higher-than-expected wage growth and possibly lower employment growth (and even declines) in the country, they add.
Moreover, pouring money into current spending does not increase the economy's long-term productivity. Therefore, when the effects of the EU Recovery plan investments are exhausted, growth is expected to slow to 2% in 2026-27.
What changes in the expectations?
In recent months, most institutions have revised down their growth forecast for the Bulgarian economy. Quite a few of them used to bet on a rate of just over 3% next year, but have subsequently lowered their expectations to 2.7-2.8%. The Ministry of Finance's forecast has hardly changed, as the department had set a 2.7% growth for 2025 back in the spring. Now it is even marginally raising its expectations by 0.1 percentage points.
Although economic growth is expected to accelerate marginally next year, it will remain below the pre-pandemic average, experts say.
On Thursday last week the Ministry of Finance published its autumn macroeconomic forecast. According to its estimates, the Bulgarian economy is expected to expand by 2.8% next year, following growth of 2.2% this year. Accelerated growth will come thanks to higher public spending, while private consumption will slow down. The document is important because it will underpin the estimates for the draft budget.
According to the forecast, Bulgaria's gross domestic product (GDP) in 2025 will exceed 215 billion levs, while this year it is expected to reach nearly 201.5 billion levs. In practice, this means that if the state wants to achieve a deficit of up to 3% of GDP, it will have to plan the budget so that spending does not exceed revenues by more than 6.5 billion levs. Also, if the nominal growth of the economy this year was 8.8%, next year it is expected to be 6.8%, as inflation is also slowing down. This means there will be less room to increase spending than in the last 2-3 years, when high inflation and wage growth helped raise more revenue.
