The economy - more of the same, but somehow different

In short, the forecasts are based on the expectation that 2024's trends will continue in the New Year - accelerating growth and slowing inflation. In short, more of the same.

On the one hand, this seems reassuring. With such unanimity about the trends, perhaps things are moving in the right direction and there is no need for special concerns. However, this kind of unanimity about maintaining the current trend may also indicate something else. No one is yet certain about the direction of travel, and therefore they make forecasts assuming that nothing will change. But it's not a bad to always keep one thing in mind while we enjoy the forecasts.

Trump and certain uncertainty

Donald Trump's presidency, backed by a Republican majority in Congress, paves the way for policies centered on deregulation, tax cuts, energy production, and protectionism. These moves sparked euphoria in US capital markets, with major indices reaching record highs as businesses anticipated reduced regulations and taxes. However, the bond market remains cautious, reflecting fears of deficits and inflation. Financial realities may temper the administration's ambitions, as excessive tax cuts or import tariffs could lead to higher interest rates and inflation.

Trump's approach to governance mirrors business negotiations, marked by unpredictability and constant shifts. His first term saw abrupt policy changes that kept markets and diplomats on edge. While this uncertainty can create challenges, it also creates opportunities for agile businesses, like those in Bulgaria, which have shown resilience in navigating geopolitical shifts.

However, households and state policies may face slower adaptation, posing significant challenges.

Budget and political crisis

Despite political instability and the continuous rotation of interim governments in recent years the economy has advanced reasonably successfully. It is no exaggeration to say that, in many cases, excessive political stability in Bulgaria has acted as a brake whereas a little more political volatility "unblocks" the economy. It is another question entirely whether we have veered between two extremes - first a long period of political stability followed a protracted period of permanent upheavals and endless caretaker governments.

We can say categorically that these years have not seen a boon in fiscal policy. For several years in a row, the budget has not been adopted on time. But this was not a particular problem given the accelerated inflation, which is a kind of bonus for the budget, bringing in more revenue.

However, several years of inflation have turned it into a ticking time bomb, which then creates expectations for high growth in public spending - all budget sectors became accustomed to budget increases of tens of percent, which were financed by increased revenue. Now in 2025, the disappearance of inflation creates a problem - with 2-3% inflation, there is no way that 20-30% increases in budget spending will happen. But it is not so easy to reduce inflated spending expectations to the real capabilities of the budget. At such times, a parliamentary majority and a regular government are needed to push through the necessary, but unpopular measures.

Last chance for EU funds?

For several years now, there has been talk that we are late in absorbing EU funds, and especially the recovery plan. But now the knife has reached the bone. The deadlines for the recovery plan expire in mid-2026 - and this includes not only the implementation of reforms and receipt of funds, but also the implementation of all investments. And many of them have not even started.

In this sense, 2025 is truly the last chance to unclog the EU funds. In fact, we may have already missed the chance to absorb all the financial resources, but in 2025 it will become clear whether we are losing the rest. Many economic forecasts for Bulgaria assume that the country will mobilize as the deadlines approach and will accelerate reforms and investments - this is logical based on previous experience and the national mentality. To some extent, this is also the reason for the optimistic economic forecasts for 2025-2026. But whether they will happen depends on the political system.

How long will the real estate bubble inflate?

It is very easy for the economy to grow if every month banks are spewing out billions in new loans - mostly mortgages, consumer loans and car leases. The credit increases the demand for housing, and because the supply grows slowly, everything boils down to price growth, which in turn stimulates even more home purchases with the expectation of future price increases. Rising house prices, in turn, create a feeling of wealth and stimulate consumption.

But how long can explosive growth in housing lending continue, and how healthy is this? History - including our own - shows that the more the real estate bubble inflates, the more dramatic the subsequent collapse. Accordingly, the more negative and long-lasting the ensuing economic consequences. And again, 2025 looks like the last chance to achieve a smooth cooling and soft landing in the real estate market. But will this be possible given the current political weightlessness - the endless freefall - which also weighs on regulators?