site.btaOECD Forecasts Lower Economic Growth and Inflation in Bulgaria in 2024 and 2025, Expects Adoption of Euro in 2026

The Organisation for Economic Co-operation and Development (OECD) expects Bulgaria's economy to grow from 2.3% in 2024 to 2.8% in 2025 before declining to 2.6% in 2026, the organisation said in its autumn report on the country's economic outlook. The data was revised down from the spring forecast released in May, when the OECD projected the economy would grow 2.5% in 2024 to 2.9% percent in 2025. 

Real growth is expected to strengthen as inflation slows.

In its autumn forecasts, the organisation projected inflation at 2.4% in 2024 and 2.7% next year, with expectations for 2026 to contract to 2.5%. The figures have been revised down from the previous report published in May, when the OECD said it expected inflation for 2024 and 2025 to be at 3% and 2.8%, respectively.

On Tuesday, the Ministry of Finance announced that it expects the country's economy to grow by 2.2% in 2025, or 1% less than the ministry's forecast given in the spring.

Low unemployment and robust real income growth will continue to support household consumption.

In its current projections, the OECD expects the unemployment rate in Bulgaria to be 4.2% in 2024 and 4.1% in 2025, falling to 4% in 2026. The level for 2024 is in line with the organisation's spring forecast, while a level of 4% was projected for 2025.

Investment in Bulgaria has contracted but will increase as EU programmes resume, with exports expected to recover due to improving conditions in the European economy. Inflation is slowing but wage pressures remain high, the report said. Continued political uncertainty would put planned reforms and investment at risk, the OECD predicts.

Interest rate dynamics will continue to follow those in the euro area, in line with the currency board and future membership of the monetary bloc, which is scheduled to take place in 2026. Modest fiscal consolidation is warranted to reduce demand pressures and maintain prudent public finances. Implementing projects and reforms under the Recovery and Resilience Mechanism would unlock EU funds and encourage investment, the OECD reports. More people returning to the country, as well as a revamped social assistance system and improved investment in skills, would help boost labour supply, the organisation predicts.

Weak demand in the EU, especially in key trading partners including Germany, is affecting the industrial sector's exports. Falling energy prices have reduced the value of energy exports, widening the energy trade deficit, but the current account surplus has widened with some recovery in primary income due to higher employee compensation, the autumn report said.

Fiscal policy will remain accommodative in the short term, with interest rates broadly following euro area monetary policy, given the currency board regime. However, monetary policy tightening on deposit and lending rates has been slow and incomplete due to high liquidity and strong competition in the banking sector.

The adoption of the euro is expected to take place in 2026 and technical preparations are progressing, the organisation reports.

Fiscal policy has been expansionary, with increases in public sector wages, minimum wages, pensions and social benefits offsetting higher VAT and income tax receipts stemming from the recovery in consumption and higher wages, the OECD said in its autumn report. Government investment has been squeezed due to delays in project implementation and poor use and delays in EU funds. The revival of investment projects will lead to an increase in government spending related to the absorption of EU funds, which will increase the budget deficit to some extent.

The government has not yet published a medium-term budget plan required by the EU, the OECD reminds.

More prudent fiscal policy and reforms are needed to tackle labour shortages. Less pronounced fiscal consolidation is warranted to reduce demand pressures and maintain prudent public finances, helping to manage long-term cost pressures from ageing, climate and security needs.

Reforming the mechanisms for setting the minimum wage as well as for setting pension rates will reduce fiscal pressures and support price stability ahead of euro adoption and ease fiscal pressures.

Active emigration policies, including support for the return of citizens to the Bulgarian labour market, activation reforms that take into account the specific needs of Roma and a review of the social assistance system, are needed to address labour shortages. Involving the private sector in government-funded vocational training will better bring skills up to market demand. The implementation of the reforms of the Recovery and Resilience Mechanism is becoming more urgent to unlock EU funds and to resume investment projects. Focusing the amendments to the REPowerEU chapter of the Recovery and Resilience Plan on decarbonisation targets would help achieve a green transition, the organisation wrote in its latest report.