OECD Economic Outlook, Volume 2025 Issue 2

Bulgaria

Economic growth will remain strong, at 3.0% in 2025, before moderating to 2.6% in 2026 and 2.4% in 2027. Household and government consumption will continue to drive growth. Investment will be supported by remaining EU fund disbursement and improved confidence linked to euro adoption in 2026. Export growth will track demand in key European markets. Headline inflation has risen due to wage pressures, restored VAT rates and higher utility prices but will moderate as wage growth slows. Persistent wage increases, however, could delay disinflation.

Strong increases in pensions, public sector salaries, social transfers and investment spending, but weaker‑than-planned revenues may require spending adjustments to maintain the budget deficit within EU limits. A moderate fiscal consolidation and more emphasis on growth-enhancing spending would help reduce inflationary pressures and support economic growth. Structural reforms to streamline renewable energy development and grid access permit procedures, business registration, licencing and utility connections would accelerate the green transition and improve the business climate.

Economic growth has strengthened

Annual GDP growth reached to 3.2% in the third quarter of 2025 according to the flash estimate. Private and government consumption remain the key drivers, supported by rising real incomes, including public sector wages, particularly in security and defence, credit and social transfers growth. Consumer confidence remains high, and retail sales continue to grow albeit at a slower pace. Investment growth has strengthened, with the implementation of EU projects gaining pace after the formation of a new government. The unemployment rate has fallen to 3.4%, reflecting continued job creation amid strong economic growth. Annual headline CPI inflation reached to 5.3% in October, reflecting wage-driven cost pressures and strong demand, underpinned by a tight labour market and indexation of minimum wages and pensions, restored VAT rates, and higher utility prices. With labour costs rising faster than productivity, the pass-through from wages to prices has strengthened.

Annual industrial production growth has continued to contract in 2025, though it showed a slight improvement in September. Confidence remains subdued, and an increasing number of firms report insufficient foreign demand. Export growth has been held back by weak demand in key markets, particularly Germany. Import growth has turned negative despite strong consumption and investment growth, with a rundown of inventories accumulated since mid-2024. Recent global trade policy changes, including higher US import tariffs on EU goods, will have a modest indirect impact, mainly through weaker EU demand, given Bulgaria’s limited direct trade linkages with the United States.

Bulgaria

1. Insufficient Foreign Demand indicator represents the percentage of industrial firms reporting weak or insufficient external demand as a limiting factor to their production growth.

2. 3-month moving average.

Source: NSI; and Eurostat.

Statlink

Bulgaria: Demand, output and prices

Statlink

Fiscal consolidation is set to occur

Lower-than-planned VAT revenue collection may leave limited fiscal room to implement all spending plans as intended. Given spending commitments on civil servant salaries, pensions and social benefits, capital expenditure may be reduced to maintain the budget deficit within the EU’s 3% GDP ceiling. Fiscal consolidation is projected over 2026-2027, curbing growth in current spending on public sector wages and social benefits alongside reductions in capital expenditure. Under NATO commitments, defence spending will increase to 5% of GDP by 2035. The European Commission has authorised Bulgaria to temporarily exceed the 3% deficit threshold until 2028 under the exceptional circumstances clause, expected to be used from 2026 onwards. The withdrawal of energy subsidies for business in sectors such as hospitality and personal services from July 2025 could add short-term upward inflationary pressures. Monetary conditions remain broadly aligned with the euro area, but high banking sector liquidity and intense competition keep interest rates for consumer loans below euro area averages and support credit growth. Following euro area accession in 2026, liquidity may increase further as minimum reserve requirements will fall from 12% to 1%, potentially requiring stricter macroprudential measures. Greater liquidity, combined with improved investor confidence, could support investment lending.

Growth is set to moderate

Growth is projected to remain strong at 3.0% in 2025 before moderating in 2026 and 2027. Household and government consumption growth will continue to support demand but to a lesser extent as wage and social transfers growth eases. Investment growth will moderate after a temporary increase due to faster implementation of EU projects ahead of the August 2026 Recovery and Resilience Facility (RRF) deadline and be supported by remaining RRF fund disbursements and improved investor confidence following euro adoption. This has already been reflected in an improved credit rating and narrower sovereign spreads. Export demand will be subdued due to weakness in key export markets, while import growth will track domestic demand. Slower domestic demand growth will help annual headline inflation ease to 2.4% in 2027, though risks are tilted to the upside. While euro–leva dual pricing and price monitoring will help mitigate rounding-up risks in the near term, stronger-than-expected wage growth could further boost consumption and delay disinflation.

Prudent fiscal policy and structural reforms are needed

A moderate fiscal consolidation, combined with a stronger focus on growth-enhancing public investment in education and infrastructure, measures to attract Bulgarian emigrants to return and labour market activation would help contain inflationary pressures, address long-term pressures from population ageing, create space for spending on the green transition and defence, and boost economic growth. Streamlining lengthy and complex permit requirements for renewable energy installations and grid access with a digital one-stop-shop would accelerate the green transition. Improving the business environment by simplifying and digitising procedures for business registration, licencing and utility connections would lower the cost of doing business and attract more capital, domestic and foreign.