site.btaEconomic Analyses Council Submits Annual Report to Government

Bulgaria's gross domestic product (GDP) grew by 1.8% in 2023. The rate slowed, compared to 2022, when GDP increased by 3.9%. This came at a time of a major slowdown in the entire EU from 3.4% in 2022 to 0.4% in 2023. It was largely a cause-and-effect situation as the development of the EU economy is crucial for the economy of Bulgaria, which is highly dependent on market demand in the bloc, says the annual report of the Bulgarian Council for Economic Analyses (BCEA), an advisory body for the government. The report, summing up developments in the national economy in 2023, was submitted to the Council of Ministers at the end of March 2024 and is accessible via the BCEA website.

It says that the main driver of the country's GDP growth in 2023 was the increase in the import of goods and services, which accelerated by 4.3 percentage points, followed by private consumption (3.1 ppt). Negative contributions to GDP growth were recorded for gross investments (-4.2 ppt) and the export of goods and services (-1.3 ppt).

Labour productivity rose by 0.9% in 2023, the report says. The increase slowed considerably from 7.5% in 2021 and 4.3% in 2022. Looking farther back in time, productivity growth slowed somewhat during and after the world financial and economic crisis of 2008-2009, and the trend was not reversed until 2017, when the indicator picked up slightly.

Gross fixed capital formation remained low as a percentage of GDP in 2023. It steadied at around 17% after recording similar values in the previous two years. This was part of a long-term trend of weak investment activity in Bulgaria. In 2023, the country's ratio of gross fixed capital formation to GDP was the second-lowest in the EU after Greece (13.9%). It means slow accumulation of capital and poor prospects of long-term investment growth and of real convergence with other EU economies.

Bulgaria had a workforce of 3.06 million people (economically active individuals aged 15 and over) out of a total population of 6.69 million in 2023. The workforce decreased by 3,500 compared with 2022. The economic activity ratio rose from 55.5% to 55.7%. Workforce dynamics, which reflected population dynamics in a rather straightforward way, held a risk of growing labour shortages. They also showed a difficulty in replacing older (retired) employees with younger ones over the short term, as evidenced by the fact that the above-mentioned year-on-year decrease of the labour force in the age group of 15 and over by 3,500 people was far smaller than in the 15-64 age group, where it dropped by 14,000. The economic activity ratio in the 15-64 age group went up by 0.2 ppt to 73.9%, which shows that labour demand remained high.

In 2023 compared with 2022, the number of unemployed people grew by just 5,100 in the age group of 15 and over, and 5,000 in the age group of 15-64. In relative terms, unemployment went up, respectively, to 4.3% from 4.1% and to 4.4% from 4.2%, the report says.

In December 2023, average annual inflation in Bulgaria fell to 8.6% after hitting a 10-year high of 14.1% in March 2023. Almost all main groups of goods and services contributed to the change, except for "miscellaneous goods and services" (personal hygiene products, jewels and watches, social services and insurance, among others), whose weight in the consumer basket is small, at 6.0%. Although average annual inflation in the country followed a global ease-off trend, it remained considerably above the 3% limit set as an eligibility criterion for euro area membership.

Bulgaria's current account balance was in positive territory in 2023, at EUR 274 million, accounting for 0.3% of GDP. This came after two years of deficit on the current account.

At the same time, the country ran a foreign trade deficit of EUR 3.6 billion.

The Finance Ministry Institute for Analyses and Forecasts (IAF) and the International Monetary Fund (IMF) expect Bulgaria's GDP to grow by 3.2% in 2024, the report says. The Bulgarian National Bank (BNB) forecasts a GDP growth rate of 2.5%. The estimate published by the European Commission is most conservative, at 1.9%. For 2025, all main sources predict around 3%, the report says.

Inflation in Bulgaria will fall considerably, according to all forecasts. The IAF predicts that the harmonized index of consumer prices will see an average annual growth rate of 4.8% in 2024 and 2.8% in 2025. The IMF expects average annual inflation to fall to 3.0% in 2024 and 2.1% in 2025. The respective levels forecast by the European Commission are 3.4% and 2.9%, while the BNB estimate is 3.1% for both years, which corresponds to other forecasts. It should be noted that the latter two sources made their forecasts towards the end of 2023, and therefore their predictions are not directly comparable to the other two, which were made earlier in the year.

The Bulgarian economy is caught in a long-lasting stagnation of investments (as measured by the ratio of gross capital formation to GDP) after years of intense investment activity before the financial crisis of 2008-2009, the report notes. A parallel with two other EU member states comparable to Bulgaria shows that, overall, investments in Bulgaria have been lower than in Romania ever since 2009 and lower than in Croatia since 2015, when the investment activity in the Western Balkan country began to recover from the financial crisis as in most other EU member states.

In Bulgaria, investments in productive capital fell gradually as a percentage of GDP after the 2008-2009 crisis to sink back to the 2000 level of around 17% by 2023. Investments in Romania in 2023 stood at 26% of GDP.

Investments in intangible fixed assets in Bulgaria rose somewhat after 2016 and are currently above those in Croatia and commensurate with the level in Romania. This is good news for Bulgaria because investing in intangible assets is considered more important for long-term GDP growth than investing in tangible assets.

The main problems with investment activity in this country are related to the very low share of investments in non-residential buildings and related infrastructure (7 ppt lower than in Romania in 2023), and in means of transport.

The likely economic effects of Bulgaria's future accession to the euro area are discussed in a separate chapter in the BCEA report. It says that the country's entry to the euro area will be the last step of integrating with EU institutions and can have an important impact on the national economy. The main conclusion is that, basically, euro area membership will not entail a major change for the Bulgarian economy. The national currency peg to the euro has kept interest rate gaps between Bulgaria and the eurozone quite narrow. The country's banking system is already under the control of the Single Supervisory Mechanism of the European Central Bank. At the same time, euro area membership will bring additional benefits for the nation. It will become easier to manage the liquidity of public finances, and transaction costs will fall. Sofia will share in the official decision-making process concerning common monetary policy and banking supervision.

The BCEA recommends using the experience of other Eastern European countries in adapting to the single European currency. The risk of capital flow instability, though reduced after accession, should still be monitored and adequate policies should be implemented as necessary. Last but not least, Bulgaria should keep up its conservative fiscal policy while adhering to the EU treaties, to avoid compromising the reliability of its public finances.