Growth is projected to moderate to 2.5% in 2026 and 2.3% in 2027. Consumption growth will slow as wage and social transfer growth ease and higher energy prices related to the evolving conflict in the Middle East erode real incomes. Investment will be led by public outlays backed by EU fund disbursements, before private investment gradually recovers as uncertainty fades. Higher energy prices are pushing up near-term inflation, and a prolonged escalation of energy prices could risk inflation remaining elevated.

Borrowing costs for households and firms have eased slightly since euro area accession. As the budget deficit was above 3% of GDP, a steady medium-term fiscal adjustment and fiscal strategy is needed to strengthen the public finances and manage population ageing, climate change and defence spending pressures. Structural reforms to accelerate renewable energy deployment, expand domestic transmission and cross-border interconnection infrastructure, and invest in energy storage would strengthen energy security while developing a price-based demand response mechanism along with improved public transport would help reduce energy demand and durably lower inflation.

Bulgaria’s economic convergence towards more advanced economies picked up in recent years, largely driven by an increase in hours worked. However, an ageing workforce and emigration are a drag on growth. The capital stock is very low compared to OECD countries, both relative to GDP and the population, contributing to low productivity.

Improving the quality of education and increasing participation in adult learning could promote upskilling and help matching skills required by employers. Reducing regulatory barriers to competition and fighting corruption, while improving judicial efficiency, would boost investment and raise productivity through a more efficient allocation of resources. Transitioning away from coal-based power generation without compromising energy security will spur investment in renewable energy and underlying infrastructure.