The European Commission has forecast a slowdown in Bulgaria’s economic growth in 2026, along with an increase in the country’s budget deficit for 2026 and 2027, against the backdrop of the conflict in the Middle East. The projections were published in the European Commission’s latest macroeconomic forecast for Bulgaria.
Real GDP growth is forecast to decelerate over the forecast horizon, mostly due to slowing growth of domestic demand. Private consumption growth is set to ease, reflecting weaker consumer confidence and lower wage growth. Public consumption is forecast to continue supporting GDP growth, which is forecast to be 2.5% and 2.2% in 2026 and 2027, respectively. Higher energy prices are expected to drive inflation up in 2026. The government deficit is set to exceed 4% of GDP in 2026 and 2027, driven by social spending and public sector wages. The debt-to-GDP ratio is expected to reach 35.5% by 2027.
Public spending to support growth amid weakening external demand
Real GDP growth reached 3.1% in 2025, driven by strong domestic demand, with private and public consumption and investment increasing strongly. Investment growth was supported by increased absorption of RRF funds. However, exports contracted in the first half of 2025 due to maintenance works by major domestic exporters, recovering only partially in the second half of the year. Import growth was stronger than expected as a result of the strong domestic demand and net exports turned negative. In 2026 and 2027, real GDP growth is forecast to moderate, reflecting slower private consumption growth amid lower wage and employment growth, as well as lower private investment. The conflict in the Middle East is expected to weigh on activity in 2026, as the adverse terms-of-trade shock reduces households’ purchasing power and weakens confidence. The conflict is also set to dampen aggregate demand through weaker employment growth and a slight downward revision to expected wage growth. Public consumption is expected to moderate but to continue supporting domestic demand. Private investment growth is expected to decrease gradually from the high levels seen in 2025. Exports are expected to recover in 2026, with major exporters operating closer to, albeit still below, full capacity, while import growth is expected to decelerate on the back of lower private and public investment growth. In 2027, these trends are set to continue, with further moderation in wage growth weighing on private consumption and GDP growth. Compared with the Commission's 2025 Autumn Forecast, import growth in 2027 has been revised downwards, reflecting the postponement of deliveries of major defence equipment to 2028. As a result, GDP is set to grow by 2.5% in 2026 and 2.2% in 2027.
Wage pressures expected to ease
Wage growth remained strong in 2025, with compensation per employee increasing by 10.4%, driven by higher-than-expected wage growth in the public sector, convergence with peer EU countries, and a tight labour market. Over the forecast horizon, wage growth is expected to moderate as the economic slowdown eases private sector wage pressures. Fiscal constraints and smaller legislated wage increases in the public sector for 2026 will further reduce upward pressure on pay, with wage growth forecast to fall to 5.7% in 2026 and 4.3% in 2027. Employment continued to expand in 2025, supported by robust labour demand and a positive inflow of foreign workers. The unemployment rate declined to a historic low of 3.5% in 2025. Significant labour shortages persist in key sectors, including manufacturing, construction, education and health, reflecting demographic trends and the shrinking working-age population. As a result, the labour market is expected to remain tight, with the unemployment rate staying below 4% over the forecast horizon. Continued labour market tightness is also expected to sustain wage pressures, albeit to a lesser extent than in recent years.
Higher energy prices drive inflation increase in 2026
HICP inflation is forecast to rise to 4.2% in 2026, mainly driven by higher energy prices linked to the conflict in the Middle East, recent increases in food prices and base effects related to the fading impact of the decline in hospital fees in April 2025. Increased input costs, second-round effects from higher energy prices, and persistent services inflation are set to keep inflation elevated in 2026-27. Overall, inflation in 2027 has been revised downwards from the Autumn Forecast, reflecting base effects arising from lower energy prices compared to 2026, and the postponement of the introduction of ETS2, which had previously been expected to drive energy prices up.
Deficit expected to exceed 4% over the forecast horizon
The general government deficit reached 3.5% of GDP in 2025. Without consistent compensatory measures, higher expenditure to improve the adequacy of social spending and public sector salaries, particularly in sectors such as defence and internal security, has led to a persistent increase of the deficit since 2022. In addition, investment grants to the Bulgarian Energy Holding amounting to approximately 0.3% of GDP further contributed to widening the 2025 deficit.
Following the resignation of the government at the end of 2025, Bulgaria has been operating under a bridge budget for 2026 until the cut-off date of this forecast. In this context, and in the absence of new adopted measures, expenditure is set to continue outpacing revenue. After a strong increase in 2025, public investment is expected to remain relatively stable throughout the forecast horizon, supported by the accelerated implementation of the RRP in 2026 and increased deployment of other EU funds and some planned defence equipment deliveries in 2027. Pressures from public sector wages are set to moderate, although increases will remain higher than in the private sector. Nevertheless, the deficit is set to increase to 4.1% in 2026 and 4.3% in 2027 due to residual automatic mechanisms in social spending and sustained defence expenditure up to 2027.
The general government debt-to-GDP ratio is forecast to increase from 29.9% in 2025 to 32.3% in 2026 and 35.5% in 2027, largely driven by the primary balance.