site.btaCentral Bank Expects Real GDP to Grow by 0.4% in 2023

The Bulgarian National Bank (BNB) expects Bulgaria's real GDP to grow by 3.4% in 2022 and by 0.4% in 2023, according to the BNB's macroeconomic forecast published on its website. Last year's GDP growth was mainly driven by the increase in private consumption and the accumulation of stocks of raw materials, materials and finished products in the economy.

Growth slowdown this year is expected to be caused by multiple factors, including the shift from a positive to a negative contribution of inventory change in the economy, the projected substantial slowdown in the growth of government consumption, as well as the expected decline in exports. Both lower external demand growth and country-specific factors, such as the ban on exports to countries other than Ukraine of petroleum products made from Russian oil and planned maintenance work at some of the country's largest enterprises, will contribute to the decline in exports.

At the same time, for 2023 the central bank forecasts high growth in investment activity as a result of the absorption of funds under the National Recovery and Plan by both the private and public sectors.

Growth in economic activity is expected to accelerate to 3.2% in 2024, mainly due to the build-up of a low positive contribution from net exports as export growth recovers.

Annual inflation is projected to slow to 4.2% at the end of 2023 due to projections for declining euro-denominated oil and food prices in international markets.

Inflation is expected to average 7% per cent over the year, with short-term pressure on producer prices stemming from factors such as increases in commodity prices and supply and labour shortages continuing to weigh on consumer prices.

Set prices are also expected to make a relatively high positive contribution to inflation at the end 2023, mainly due to projected increases in the prices of water and sewerage services, natural gas and the increase in the excise duty on tobacco products. Inflation is set to slow to 3.3% 2024, following the downward trend in international food and energy commodity prices.

The risks to the real GDP growth forecast are assessed as balanced for 2022 and 2023, while for 2024 the risks of lower growth than in the baseline scenario prevail. In the short-term,  it is possible that real GDP growth could be higher if more favourable economic developments in the country's main trading partners materialise or if firms maintain high inventories for longer compared to the baseline scenario. The risks for lower economic activity stem mainly from the ongoing military conflict in Ukraine and heightened economic uncertainty globally, as well as from the possibility of faster and larger interest rate hikes by leading central banks relative to the baseline scenario, coupled with an increase in the degree of spread to domestic interest rates. In addition, there are significant risks of a slower implementation of investment projects under the National Recovery and Resilience Plan and absorption of funds under EU programmes.

Risks related to potential natural gas shortages in Bulgaria and its main trading partners appear limited for the current winter, but are likely to increase again in the winter period of 2023-2024. Risks to the inflation outlook are dominated by risks of stronger price increases relative to the baseline scenario over the entire forecast period. These risks are related to the dynamics of energy and food commodity prices in international markets, as well as the possibility of a larger than forecast spread to consumer prices of higher unit labour costs in an environment of historically low unemployment, which is a precondition for higher than projected underlying inflation. Risks to the realisation of higher than projected inflation also stem from the likelihood of higher administered price increases over the forecast period relative to the baseline scenario.