• The raise by 0.8%, compared with the expectations in September, is a result of more optimistic expectations for exports and the pace at which the higher ECB rates are transmitted into the Bulgarian economy

In the latest report of UniCredit Bulbank’s economists, the 2023 real-growth forecast is raised by 0.8%, to 1.3%, to reflect a weaker slowdown in exports and slightly lower inflation than initially expected three months ago. The slower transmission of the increased cost of credit in the eurozone, compared with the expectations in September, to the Bulgarian economy is also among the reasons for the raised growth forecast in 2023. 
Maintaining the generous support scheme for electricity business consumers is expected to have a positive impact on companies’ hiring decisions, thus supporting income and economic growth in the short term. In 2024, the bank’s economists forecast real GDP growth to accelerate to 3.3 %. At the heart of this will be the weakening of inflation, the end of the period of terms-of-trade deterioration, as well as some reduction in global interest rates, compared with the levels expected to be reached in developed economies in the previous year – 2023. 
The immediate outlook for the economy over the next few months in the country remains unfavorable. The bank’s economists expect high inflation to weigh on demand, reducing growth and pushing the economy into a shallow and short-term recession this winter.
 
Bulgaria is experiencing a weaker terms-of-trade deterioration than most of the EU countries, as raw materials and intermediate consumption goods with low-level processing dominate the export structure. The result is a weaker deterioration in the country’s trade deficit than that of most EU countries. This trend will remain an important factor supporting the growth of the Bulgarian economy in 2023.
The economists think that the conflict between Russia and Ukraine will limit the role of both countries in a large number of global supply chains, and this would help maintain the possibility for strong performance of some sectors of the Bulgarian economy such as food and metal manufacturing sectors, along with maintaining high volumes in the production of ammunition. This will have a positive impact on employment and income rates in the country, and hence consumption and economic growth in 2023. 
The slow transmission of higher ECB interest rates into the Bulgarian economy should mitigate economic growth contraction in winter. Interest rates applied to BGN-denominated loans to firms and households have been tightening very slowly, despite the sharp rise in ECB rates last year. The slow transmission of higher ECB interest rates into higher costs of BGN-denominated credit would prevent a sharper contraction of real growth in the winter of 2023. 
The bank’s economists expect from the next regular government a high level of continuity in terms of economic policy, as the adoption of the euro will remain an important priority and the country is likely to replace the BGN with the euro in early 2024.
The full version of the report can be found on the bank’s website or at the following link. 

 

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