Growth will pick up to 2.3% in 2024 and 2.8% in 2025, before easing to 2.6% in 2026. Activity has been supported by higher wages and government transfers to households. Real growth is expected to pick up, as inflation slows with the diminishing impact from the energy shock. Investment has been subdued but will pick up as the rollout of EU funds resumes. Exports are expected to recover due to improving conditions in the European economy. Inflation has been slowing, but wage pressures remain elevated. A prolongation of political uncertainty would place planned reforms and investments at risk.

Interest rate developments will continue to track those in the euro area, in line with currency board and future euro membership, which is assumed to occur in 2026. Public sector wage rises and increased social spending have widened the fiscal deficit. A modest fiscal consolidation is warranted to reduce demand pressures and maintain prudent public finances. Implementing Recovery and Resilience Facility projects and reforms would unlock EU funds and boost investment. Activation policies, with better support for those returning to Bulgaria, a revamp of the social welfare system and improved skills investments would help to boost labour supply.

GDP increased by 2.2% over the year to the third quarter of 2024 with strong household consumption driven by wage increases, credit growth and government transfers. Both public and private investment have been weak due to political uncertainty and low absorption and delay of EU funds. The headline inflation rate has continued to slow from 5.8% in October 2023 to 1.8% in October 2024, with core inflation at 2.9%. Unemployment has been declining in tandem with the pick-up in economic activity. Business surveys suggest that labour shortages have been the most severe in construction and services since the pandemic.

Weakness in EU demand, particularly in key trading partners, including Germany, is weighing on manufacturing exports. Declining energy prices have damped the value of energy exports, resulting in a widening energy trade deficit, but the current account surplus increased with some recovery in primary income due to higher compensation of employees.

Interest rate developments will continue to broadly follow euro area monetary policy given the currency board regime. However, transmission of the monetary policy tightening to domestic deposit and lending rates has been slow and incomplete due to high liquidity and stiff competition in the banking sector. Euro adoption is expected to occur in 2026, with technical preparations already progressing. Fiscal policy has been expansionary with increases in public sector salaries, minimum wages, pensions and social benefits, offsetting higher VAT and income tax receipts stemming from the recovery in consumption and higher wages. Government investment has been subdued due to delays in project implementation, and low usage and delay of EU funds. The revival of investment projects will lead to an increase in government spending related to the utilisation of EU funds, somewhat widening the budget deficit. The government has not yet published a medium-term budgetary plan required by the EU.

Growth is set to increase from 2.3% in 2024 to 2.8% in 2025, before easing to 2.6% in 2026. The rollout of unlocked EU funds is expected to spur both public and private sector investment that were held back in 2024. Low unemployment and robust real income growth will continue to support household consumption. Export growth should recover in line with external markets. Inflation is set to remain around current levels, but a further increase in minimum wages in 2025 coupled with persistent labour shortages will keep wage pressures elevated. Slow implementation of projects and delays in the passage of reforms required to release the second payment of Recovery and Resilience Facility risks a reduced level of investment.

A modest fiscal consolidation is warranted to reduce demand pressures and to keep prudent public finances, helping to manage long-term spending pressures from ageing, climate and security needs. Reforming the current minimum wage and pensions indexation mechanism to slow the pace of growth in labour costs and government spending would underpin price stability ahead of adoption of the euro and ease fiscal pressures. Proactive emigration policies, including support for resettlement in Bulgaria, activation reforms that consider the specific needs of Roma and overhauling the social welfare system, are necessary to address labour shortages. Involving the private sector in government-financed vocational training will better align skills with market demand. Implementation of the Recovery and Resilience Facility reforms is becoming increasingly urgent to unlock the EU funds and resume investment projects. Focusing the amendments to the REPowerEU chapter in the national recovery and resilience plan on decarbonisation objectives would help to achieve the green transition.