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OECD expects Bulgaria’s economic growth to strengthen to 2.5% in 2024

Bulgaria’s economic growth is expected to strengthen to 2.5 per cent in 2024 and 2.9 per cent in 2025, as government investment picks up, along with the rollout of EU funds, the Organisation for Economic Cooperation and Development (OECD) said in its Economic Outlook report on May 2.

Private consumption growth will moderate, but it will remain strong, supported by high wage and credit growth, the OECD said.

Improving external conditions and easing constraints on production are expected to lift trade volumes, according to the report.

While headline inflation has been slowing, high wage growth is an obstacle to faster disinflation.

“Continued political uncertainty places planned reforms and investments at risk,” the OECD said.

Interest rates have followed those in the euro area, consistent with the currency board, but transmission to the Bulgarian economy is slow and incomplete, contributing to a household credit boom, it said.

The OECD said that further macroprudential measures should be deployed to slow the pace of loan growth.

The fiscal deficit is set to widen substantially with further rises in spending in 2024.

“A more prudent fiscal policy would therefore be warranted to manage demand and prepare for longer-run challenges.”

Commitments to fully implement Recovery and Resilience Facility reform measures and a comprehensive green transition roadmap would allow Bulgaria to boost trend growth and green the economy.

The OECD said that Bulgaria’s economy grew by 1.8 per cent in 2023, driven by consumption and investment.

High wage growth and low interest rates have underpinned the dynamism of domestic consumption.

The slow and incomplete transmission of euro area monetary policy tightening, together with high inflation, have led to an acceleration in household credit.

Loan growth was particularly strong in the housing sector with annual mortgage loan growth in excess of 20 per cent for three straight months in the first quarter of 2024.

Industrial production remains weak, the report said.

Annual inflation has fallen from 14 per cent in March 2023 to three per cent in March 2024.

Trade volumes have shown signs of recovery in 2024. Export volumes declined in 2023 reflecting both external demand weakness and supply-side constraints in industrial production.

These factors also contributed to the decline in import volumes during the same period, which was driven by a sharp decline in imports of raw materials.

The switch away from Russian crude, maintenance work in one of Bulgaria’s main nuclear power plants and declining energy prices have damped the value of energy exports, the OECD said.

Interest rate developments will continue to follow euro area monetary policy, given the currency board regime and planned euro adoption, the report said.

The deficit is currently at moderate levels but is set to widen significantly.

The 2024 budget targets a 12.1 per cent nominal spending increase with the growth in spending reflecting higher social transfers, including an 11 per cent increase in minimum pensions along with a steep rise in public sector salaries.

Higher capital spending for municipal infrastructure projects and defence are also envisioned.

Reduced VAT rates for bread, flour, and restaurant and catering services remain in place, but these temporary fiscal support measures will be withdrawn by year-end, the report said.

Growth is set to rebound to 2.5 per cent in 2024 and 2.9 per cent in 2025. Low unemployment and high wage growth will help to support consumption.

Receipt of the second tranche of EU funds, totalling 724 million euro (0.7 per cent of GDP) this year, is expected to boost public and private investment.

Exports should recover in line with external developments, according to the report.

Inflation is set to slow to three per cent in 2024, driven by declines in global food and energy prices along with announced measures by the government to cover the cost of university tuition and cardiovascular medicines, but core inflation will be sustained by high nominal wage growth.

Elevated wage pressures, paired with persistent labour shortages, will make it more difficult to bring inflation in line with that of other euro zone countries, with headline inflation projected to be 2.8 per cent in 2025.

Difficulties and delays in the passage of reforms required to release EU funds risk a reduction in fund amount and complementary investments, the OECD said.

Source: Sofia Globe