site.btaEconomy Not in Crisis, There's No Excuse to Give Up on Reforms – Think-Tank

Amid political lamentations over an alleged serious crisis in Bulgaria, a strong dose of economic data released in the outgoing week has given a far more serene and even moderately optimistic picture. The new government has some advantages which, at least initially, offer leeway to do some real work and address structural issues, provided there is willingness for such steps. This is important because medium-term challenges (a looming recession in Europe's economic powerhouses, a general loss of competitiveness in the EU, uncertainties associated with the US trade policy) require Bulgaria to maintain a good investment environment and boost the productivity of its human capital, Institute for Market Economics (IME) chief economist Latchezar Bogdanov says in an analysis published on the IME website on February 14.

While conceding that January 2025 inflation in Bulgaria (2% against December 2024 and 3.7% year on year) was considerably higher than in the previous months, Bogdanov notes that it is a far cry from the doomsday rhetoric of the last few weeks. Besides, it is largely the result of one-off factors such as the abolition of 0% VAT on bread and of the special VAT rate for restaurants, an administrative hike on electricity prices and an increase in international oil and natural gas prices. Not great, not terrible. These developments show, however, that the period of falling average annual inflation is over and the coming months will likely see inflation settle around the current level. Will this be enough to meet the price stability criterion for adopting the euro? Even if it will be enough, the Bulgarian economy seems set to function with an inflation rate of around and above 2% despite the meagre growth of the large European economies.

The incumbents in Sofia probably find it more reassuring to see what is happening on the labour market, the analysis goes. Bulgaria continues to maintain low unemployment and double-digit annual wage growth. In the fourth quarter of 2024, unemployment fell by 0.4 percentage points year on year to stand at 3.8%. Meanwhile, employment in the 20-64 age group went up by 0.7 percentage points to 76.8%. Demographic trends weigh visibly on the labour force, with the number of employed people under 35 years of age continuing to decrease and those over 55 increasing tangibly.

In December 2024, employed individuals increased by 25,700 compared with December 2023. Those in the extractive industries and agriculture decreased further, while people employed in hotels and restaurants, construction and information technology grew markedly. The impact of the personal care assistance mechanism is visible; it was the main reason for an increase in the number of people employed in social services by over 12,000 in 2024 (and over 40,000 in the last four years).

Structural labour market deficits and demographic processes continue to exert considerable upward pressure on labour costs, although the pace of growth of the average wage slowed somewhat to 13.7% in the fourth quarter of 2024 year on year. The rate in the private sector was a little higher, at 14.2%. A more substantial average-wage increase was reported in the services sector (trade, transport, tourism). A rapid increase was also observed in the professional job sector and scientific research, where monthly wages are steadily in excess of BGN 3,000. In IT services and telecommunications, the year-on-year increase of the average wage was slightly under 10% in the fourth quarter of 2024 but pay rates in these industries are still much higher than anywhere else.

Data on industrial production and exports are a cause for concern, although the figures are not surprising, given the stagnating economies of Bulgaria's principal trade partners. Monthly exports dropped year on year throughout the fourth quarter of 2024. The output of the manufacturing industries registered a minor drop in November and December.

All this made for rather decent GDP growth in Bulgaria in the fourth quarter of 2024, by 3.1% year on year, compared with an average of 1.1% in the EU and 0.9% in the euro area. Bulgaria is among the fastest-growing EU economies along with Spain, Poland and Lithuania. The main growth driver here is consumption, while investments make a minor contribution and exports are dragging. An optimistic mind would conclude that the country has great potential for economic growth in 2025, provided that public investments are unlocked under a stable government and private investments are invigorated with fiscal prudence coupled with structural reform plans. The new government should know better than to look for excuses by referring to a non-existent crisis and a poor economic legacy, the IME says.