Macroeconomic Overview
Bulgaria’s economy in 2025 continues to demonstrate a stable performance, largely driven by household consumption and wage increases. These factors have helped to cushion the effects of slower industrial output and weaker trade activity. Despite existing inflation risks, the adoption of the euro now appears highly likely, positioning the country for a major economic transition by early 2026.

GDP Growth
Economic growth in the first quarter of 2025 stood at 2.9%, broadly in line with 2024 figures. Consumer spending and investment are trending positively, though the trade balance remains a drag due to rising imports and falling exports. Wages - both in public and private sectors - are increasing, supporting household demand. Retail, wholesale, and financial services are among the strongest performing sectors, while mining and utilities have continued to decline.

Looking ahead, GDP growth is expected to stay at 2.8% for the full year before slowing slightly to 2.3% in 2026. While the labor market remains tight and supportive of income gains, the weak performance of net exports is likely to persist in the short term. Longer-term prospects may benefit from more supportive fiscal policies across Europe, Bulgaria’s integration into the euro area and Schengen zone, and improved regional infrastructure. Nonetheless, delays in EU fund absorption and lower investment levels are expected to constrain the country’s productive capacity going forward.

Industrial Output
Industry remains the most fragile segment of the economy. Output has declined by 6% compared to pre-pandemic levels, with manufacturing contracting again in April - marking its weakest point since July 2021. Mining and energy continue to underperform, further dragging the sector. While some areas like machinery, leather goods, furniture, and tobacco have seen gains, others such as pharmaceuticals, energy production, and basic metals have deteriorated.

Although the German government’s fiscal stimulus may eventually provide a lift to Bulgaria’s export sectors, any meaningful improvement is likely to materialize later. In the near term, small benefits may stem from Bulgaria’s euro and Schengen accession and broader infrastructure investments tied to NATO and regional initiatives.

Trade and Balance of Payments
Between January and April 2025, Bulgaria’s trade deficit expanded by 75% compared to the same period last year. The shortfall was driven by increased imports - especially from non-EU partners - alongside declining exports. Trade imbalances with China and Turkey widened, while Bulgaria’s surplus with Germany diminished. A positive offset came from a recorded surplus with Romania during the same period.

Tourism remains a strong contributor to the services balance. Bulgaria’s mountain and seaside resorts continue to attract visitors from both neighboring countries and broader Europe, especially in the context of a sluggish European economy. This steady flow of tourism revenue is expected to partially compensate for the growing goods deficit in 2025.

On the capital side, the EU’s cohesion funds and the planned Recovery and Resilience Facility disbursements - one expected in July and another later in the year - should help bolster the secondary income and capital accounts. Political stability will be crucial for attracting more foreign investment, though euro adoption, coupled with Bulgaria’s low corporate tax rate, could stimulate short-term investor interest. Strategic relocations from neighboring countries and regional defense infrastructure projects, such as the Vertical Corridor, may also play a role.

Inflation Dynamics
Consumer prices rose to 3.7% in the second quarter after a sharp increase earlier in the year. The uptick was fueled by the return of standard VAT rates on items like bread and restaurant services, hikes in utility costs, and higher tobacco excise duties. Wage growth and elevated food prices added to the pressure. The liberalization of household electricity pricing, though once seen as a risk, has been postponed and no longer poses an immediate threat.

Still, fears over price hikes linked to the upcoming currency switch have surfaced. Public scrutiny and state-imposed sanctions are attempting to counter any speculative pricing behavior. Campaigns and consumer boycotts have already emerged in response to reports of unjustified price increases. The transition to the euro, amid accelerating wage growth, may continue to fuel inflation expectations in the near term. Current forecasts place end-2025 inflation at 3.9%, easing to 3.0% in 2026.

Fiscal Policy Trends
Government spending in the first five months of 2025 has remained heavily tilted toward stimulating consumption. Outlays for public wages and social transfers significantly outpace capital expenditures - by 3.7 and 6.2 times, respectively - higher than the 2024 ratios. This pattern has sparked growing debate about the sustainability of wage increases and their long-term impact on competitiveness.

Though Bulgaria has long maintained a reputation for fiscal prudence and still carries low public debt levels, the current emphasis on social spending raises questions about its trajectory. The baseline projection remains a budget deficit of 3.0% of GDP for the year.

Euro Adoption Approaching
Bulgaria’s transition to the euro appears all but locked in for January 1, 2026. Positive assessments from the European Central Bank and the European Commission have cleared the way for Ecofin to formally approve the move at its July 8 meeting. Attention in the second half of 2025 will shift to completing technical and administrative preparations.

Although public debate over the euro remains polarized, the government is expected to manage the situation and deliver the transition as scheduled. Assuming no major fiscal slippage, Bulgaria is likely to stay aligned with EU standards and complete its entry into the eurozone within the anticipated timeframe.

Source: via BGNES - Stefan Posea is an economist based in Bucharest, responsible for Romania, Bulgaria, Serbia and Croatia. He joined ING in September 2023. Stefan Posea holds an MSc in Economics from Birkbeck, University of London, and a BA in Finance from the University of Economic Sciences in Bucharest. His analysis has been published in ING THINK.