The role of consumption and credit: what actually underpins the GDP growth in Bulgaria

When we hear that "GDP is growing", it sounds like good news for everyone. Behind these percentages, however, lies an important question: thanks to what exactly is the Bulgarian economy growing – exports, investments, or domestic consumption, fueled by credits and subsidies? The answer is not straightforward, but recent years clearly outline a trend – the engine is increasingly the Bulgarian consumer with a bank card in hand, and not the factory that exports production abroad.

Who pulls GDP up: a look at the figures

After the slowdown in 2023, economic growth is gradually accelerating and approaching 3–3.5% annually. The largest contribution to this result comes from final consumption, which is growing faster than exports and investments. Simply put – what we buy as households and the state supports the growth curve upwards, and not a steadily increasing export or an investment boom.

Official macro analyses summarize the trend as follows: "Final consumption maintains its positive effect on GDP growth, while the influence of the foreign trade balance and gross capital formation is inconsistent." This means that the domestic market is increasingly compensating for weaknesses abroad.

Foreign demand: from engine to variable factor

For a small, open economy like the Bulgarian one, exports are traditionally a key driver. In recent years, however, weaker demand in the EU and the movement of fuel and energy prices have made the contribution of foreign trade more volatile. In some years, net exports even pull growth down instead of pushing it forward.

Forecasts for the coming years expect some improvement, but still with weaker growth in foreign demand compared to domestic demand. This places limits on the "export more and grow from there" model – at least in the short term.

Investments: potential with the condition "if"

Investments in machinery, technology, and infrastructure are what determines whether today's growth will continue tomorrow. The data show a moderate increase in gross fixed capital formation, but it is still not enough to talk about an "investment boom". In some years, the contribution of investments to GDP is positive but unstable.

International institutions are unanimous: the growth rate by the end of the decade will strongly depend on how well Bulgaria will be able to implement the Recovery and Resilience Plan projects and effectively absorb European funds. If the infrastructure and green projects go ahead, they can become a second strong engine of GDP along with consumption. If they are delayed, the economy remains "on the shoulders" of households and the budget.

Domestic demand – the hidden champion of growth

Domestic demand – household consumption, government spending, and investments – is increasingly described as the main driver of growth. Official forecasts directly state that the positive contribution of domestic demand will be crucial for economic growth, while net exports will play a smaller or even negative role.

The reason is a combination of factors: wage growth, lower inflation compared to the peaks of 2022–2023, low unemployment, and a gradual return of consumer confidence. Thus, the personal decisions of millions of households – to buy new equipment, change their home, travel – turn into aggregated statistics that politicians cite as "solid economic growth".

Credits and subsidies: fuel or risk of overheating

The logical question is: where do the funds for this higher consumption come from. Part of the answer is in the dynamics of lending. In recent years, household loans have been growing at a double-digit rate – especially mortgages and consumer loans. Banks report that "strong domestic demand is supported by the rapid growth of household income and credit".

To this private resource are added the public ones – government spending and European subsidies. Social payments, pensions, support for agriculture, European programs for business and infrastructure – all this enters the economy as additional demand. Thus the model becomes: "income + credits + subsidies = growth". The question is how long this formula can be maintained without side effects.

Pros: catching up and a visibly higher standard

The positive effect of this model is seen with the naked eye. Bulgaria is gradually approaching the average incomes and consumption in the EU. More loans mean access to housing, education, and modern services for people who would otherwise rely only on limited savings. European funds are turning into renovated streets, new trains, renovated schools, and hospitals.

International analyses place Bulgaria among the potential leaders in growth in the region if domestic demand remains strong and investments are activated. This gives hope that catching up with richer countries can continue instead of slowing down.

Cons: an economy "on credit" and a fragile balance

On the other side are the risks. When growth relies mainly on consumption, fueled by credits, the economy becomes more sensitive to changes in interest rates and the labor market. The double-digit growth in household loans raises questions as to whether in certain segments – especially the housing one – there are signs of overheating.

An additional risk comes from the dependence on European funds: a delay in programs or a political blockage of funding can quickly cool down investments and part of domestic demand. Thus the model "domestic consumption plus eurofunds" seems sustainable only in relatively calm external and internal political times.

What does this mean for the "ordinary person"

Behind the dry terms are many personal decisions. When the statistics record growth in mortgage and consumer loans, these are tens of thousands of households who have chosen to live better today, deferring their future income. This leads to a higher standard in the short term, but also to a greater dependence on the stability of the workplace and the economy as a whole.

In the long run, the sustainability of this model depends on two simple but key questions: will incomes continue to grow fast enough to cover the growing obligations, and will the economy manage to stand more firmly on productive investments and competitive exports, and not just on spending.

The balance ahead: between consumption, exports and investments

No society can develop sustainably if it relies on only one engine. For many years, Bulgaria relied on cheap labor and exports of goods with low added value – a model with a natural ceiling. Now the pendulum has swung towards strong domestic consumption, supported by credits and public funds.

The real challenge in the coming years will be to find a balanced combination: to continue to live better today, but without spending our tomorrow's future in advance. Because behind the question "at whose expense does GDP grow" stands a much more personal one – whether at the end of the month the balance between income, bills and credit installment leaves us with a feeling of security, or of life "on the edge".