site.btaCentral Bank Expects Bulgaria's GDP to Continue to Grow Supported by Domestic Demand

In the first quarter of 2024, the real GDP of Bulgaria is expected to accelerate, which is a prerequisite for the formation of similar dynamics in the annual rate of change of the indicator, the Bulgarian National Bank (BNB) says in its regular economic review released Monday.

The forecast is based on the composite economic activity indicator constructed by the BNB.

The GDP growth in the quarter is mainly due to the data on the improvement of consumer confidence, the positioning of the global Purchasing Managers' Index (PMI) above the neutral limit of 50 points, the increase in the indices of production in construction, retail trade and services (non-trade related) in real terms, as well as the increase in loans to households and firms, the central bank noted.

In the second and third quarter of 2024, real GDP is projected to continue growing both quarter-on-quarter and year-on-year, supported mainly by domestic demand and the assumed improvement in the outlook for external demand for Bulgarian goods and services.

In the fourth quarter of 2023, real GDP increased by 0.5% on a quarterly basis (0.4%
in the third quarter), while on an annual basis, growth was 1.8%. Overall for 2023, economic
activity increased by 1.8% in real terms as a result of these developments.

Bulgaria’s current and capital account surplus for the last 12 months as of January 2024 was 1.6% of GDP compared to 1.3% of GDP as of December 2023, due to the current account shift
from a deficit to a small surplus. The financial account balance for the last 12 months as of January
2024 was negative reflecting the stronger accumulation of liabilities to non-residents compared to the
acquisition of foreign assets by Bulgarian residents.

As a result of the flows in the current, capital and financial account of the balance of payments, Bulgaria’s gross international reserves for the last 12 months as of January 2024 increased by EUR 1.1 billion.

In the first two months of 2024, annual growth of non-financial corporations’ deposits continued to slow
down, with the persistent trend of falling nominal turnover in the industrial sector potentially affecting
this development. Households’ preference to keep their free funds in the form of deposits in the banking
system and rising labour income contributed further to the relatively high growth of household deposits,
which stood at 10.8% by the end of February. In the context of still low interest rates on new time
deposits of households, the banking system’s total deposit growth continued to be almost entirely driven
by overnight deposits. 

High liquidity and capitalization in the banking sector, as well as competition between banks, limit the
effects of increases in euro area policy rates and of the rise in minimum required reserve rate by the
BNB to 12% from 1 July 2023, on interest rates on new loans in the household sector. Annual growth of credit to households accelerated to 17.1% in February 2024, reflecting to a larger extent housing loans and, to a lesser extent, consumer loans. Demand for loans by households was further supported by rising labour income and interest rate levels, which remained very low in the case of housing loans. In February 2024, credit growth to non-financial corporations reached 8%.

The labour force declined on an annual basis in the fourth quarter of 2023 due to the continued decline in the working-age population and labour outflows, while the unemployment rate increased by 0.4 percentage points to 4.2%. National accounts data recorded employment growth of 1.2% year-on-year, mainly driven by the services sector, while labour shortages in Bulgaria continued to widen, exerting upward pressure on wages in real terms despite the reported decline in labour productivity.

Annual inflation, as measured by the HICP, continued to slow down and stood at 3.1% in March
2024. This dynamics was mainly driven by the base effect of rapid price increases in food and core
component groups in 2023 and, to a lesser extent, by the depreciation of energy products and industrial
goods. Strong growth rates in private consumption and unit labour costs were factors stemming from
the domestic environment, which continued to exert inflationary pressure. In March 2024, services and
goods with administratively controlled prices and tobacco products made the largest positive contribution
to headline inflation, followed by food products.

Annual inflation is projected to continue to decelerate in the second and third quarters of 2024. However, the anticipated sustained strong consumer demand and rising unit labour costs will continue to exert inflationary pressure on prices, the BNB review says.