WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

Bulgaria faced a new political crisis after the government lost a no confidence vote in parliament on 22 June. The motion followed the decision by one of the parties in the heterogeneous four-party coalition to pull out of the government due to disagreements over its policy course. On the economic front performance was better than previously expected, with GDP growing by 5% year on year in Q1, thanks to robust exports and private consumption in that period. However, high inflation remained a big headache for the authorities; apart from the effect of global factors, it accelerated as a result of loose budgetary and income policies. The June 2022 EC Convergence Report concluded that Bulgaria did not fulfil the conditions for the adoption of the euro, citing two problematic conditions: (i) failure to fulfil the criterion on price stability, and (ii) legislation which was not fully compatible with the euro zone requirements. Given such a conclusion, Bulgaria’s target date to adopt the euro on 1 January 2024 now seems problematic. In Q2 economic activity slowed down considerably. However, thanks to the strong performance in the first months of the year, we now expect GDP to grow by 2.5% in 2022 as a whole, which is 0.5 percentage points higher than envisaged in our Spring Forecast. At the time of writing it was not clear how the political crisis would be resolved, and the uncertainties about the future policy course were rising.