Allianz forecast for Bulgaria: Almost zero GDP growth and over 10% annual inflation for 2023

GDP growth close to zero (0.9%) and continued inflation of over 10% on an average annual basis in 2023 is predicted by the global leader in trade credit insurance Allianz Trade (formerly Euler Hermes) in its regular report on Bulgaria. On this basis, international analysts summarize their forecast for the country in one sentence - "Fear of stagflation". They point to the weakening of key drivers of economic growth such as exports, which are expected to more than triple to 2% from 7.1% last year.

"The Bulgarian economy is highly dependent on exports and is therefore vulnerable to external shocks. The consequences of the Russian invasion of Ukraine and the gloomy prospects for the economic development of the European Union - the main export destination for Bulgarian business, will certainly have a negative impact. Added to this is the reduced purchasing power of the population due to persistent inflation, with household spending also expected to slow down significantly to 1%. As a result, we have indications of even a weak recession at the beginning of 2023 in Bulgaria," explains Dr. Manfred Stamer, chief analyst of Allianz Trade.

Among the negative trends, the serious mistrust in the business environment stands out, as proof of this is the tangible drop in investments by -7% for 2022. Experts also draw attention to Bulgaria's energy dependence on Russian gas supplies, as well as political instability in the country and public dissatisfaction with the standard of living.

Strong fiscal measures, which ensured public spending growth of 6% in 2022 and were a major factor behind GDP growth of 3% over the period, are also expected to be limited. Therefore, according to Allianz Trade experts, the key compensation mechanism for the development of the Bulgarian economy in 2023 will be the fresh flow of European money. If stability is achieved and the processes are calmed down, the analysts see a longer-term perspective for a modest growth of Bulgaria's GDP in 2024 of around 2%.

According to Allianz Trade's forecast, in 2023, the tendency for wages to try to catch up with price growth is expected to continue in our country, but to move slightly behind. If in 2022 a 14% average increase in wages is reported with an inflation of over 15%, the forecasts for the current year are for a 9.5% increase in wages compared to an average annual inflation of just over 10%. The unemployment rate will settle around 5%.

"In conditions of stagflation and unclear forecasts for the economy in Europe and at the global level, Bulgarian business must be particularly attentive to risk management. With a significant slowdown in exports and limitation of domestic consumption, no one is insured until they are really insured," says Camelia Popova, manager of Euler Hermes for Bulgaria. "In the coming year of widespread fear of recession, contracts, transactions and payments on them will be more or less in question. Therefore, trade credit insurance from a reliable partner with a global network can prove to be a lifeboat in a stormy sea even for businesses with serious experience, established commercial relationships and a long history," she is emphatic.

Along with the risk factors for the development of the Bulgarian economy, the analysts of Allianz Trade for another year report the positive indications, mainly related to fiscal stability. On the one hand, the existence of a currency board supports resilience to turbulence at the global level, and on the other hand, traditionally conservative fiscal policy also reduces risks even in periods of strengthened anti-crisis budgetary measures due to COVID-19 and the war in Ukraine. Although during the last challenging years Bulgaria came out of the long series of budget surpluses, experts expect that in 2023 and 2024 the annual deficit will stabilize below -3% of GDP. The public debt in our country also reached levels of around 24% of GDP compared to 20% of GDP in 2019, and Allianz Trade's forecast is that it will stabilize in the current and next year without significant change. Despite the increase, experts are adamant that the current ratio continues to be one of the most favorable within the EU.

After Bulgaria's admission to the "waiting room" of the Eurozone and the Banking Union in 2020, Allianz Trade analysts expect the country's accession to the Eurozone to happen at the earliest in 2025.

The experts' overall assessment of the current business environment in Bulgaria is "adequate" with positives such as the tax burden, the freedom of the labor market and trade relations, but also with some long-term unresolved problems related to the effectiveness of the judicial system, corrupt practices, as well as investment restrictions. In the perspective of the new ESG era, analysts also pay special attention to the country's ranking in 72nd place out of 210 according to the Allianz Trade index for environmental sustainability. Along with relatively favorable indicators of the level of carbon emissions relative to GDP, attention is also focused on areas of serious lagging, such as the development of renewable energy sources and the level of waste recycling.