EC revises up Croatia's 2018 GDP growth rate to 2.8%

The European Commission on Thursday revised upward Croatia's GDP growth forecast for 2018 to 2.8% from 2.6%, noting that a surprisingly strong growth in the second quarter signalised a solid growth throughout the year.

The growth forecast for 2019 was revised upward as well, to 2.8% from 2.5%. GDP is expected to eventually reach pre-crisis levels in 2019, while in 2020 it is expected to slow down to 2.6%.

"After closing 2017 on a weak quarterly reading, real GDP growth regained momentum in the first half of the year, posting a 1.1% q-o-q rate in the second quarter," reads the European Commission's latest European Economic Forecast.

In the second quarter of 2018, growth picked up to 2.9% from 2.5% in the first quarter.

The EC forecast says that household consumption is not expected to slow down and that it is supported by positive employment and income trends.

"Household consumption is expected to remain the main growth driver over the forecast horizon, as disposable incomes benefit from rising wages and employment, as well as steadily increasing tourist receipts and remittances," says the report.

Furthermore, the purchasing power of households will be supported by subdued inflation, thanks to the planned reduction of VAT rates for some products to 13% in 2019 and 2020, and consumer credit at low interest rates, according to the report.

Also, private investment is set to benefit from favourable financial conditions,  while public investment is projected to intensify as the currently lagging absorption of EU funding picks up toward the end of the programming period. 

"The pace of export growth for both goods and services slowed down in the first half of the year and is set to moderate further in the second half. At the same time, imports of goods and services, while slowing somewhat, continue posting high growth rates," reads the report.

External demand for Croatian goods is expected to remain solid. However, the pace of exports' market share gains is likely to have peaked, and growth of goods exports is projected to continue moderating.

"Similarly, after years of record-setting numbers, revitalised competition in the Mediterranean is expected to have a dampening impact on the expansion of tourism services exports," says the EC forecast.

Goods imports are projected to continue increasing steadily on account of strong domestic demand, while growth of imports of services is expected to slow down. As a result of these developments, the trade balance is set to progressively deteriorate, but remain positive.

In turn, the current account surplus would edge down to below 2% of GDP by 2020, also thanks to higher profits in the banking sector owing to the absence of temporary effects, such as the Agrokor-related provisioning of last year, the EC says.

The Commission expects employment to grow by 2.3% this year, and to grow moderately in the next two years. Wage growth is expected to peak this year on the back of higher wages in the public sector.

With unemployment falling rapidly and demand for labour intensifying in some sectors, wage pressures in the private sector are expected to grow stronger in 2019 and 2020.

As the labour market continues improving, migration outflows are expected to ease and the negative trend in participation rates is expected to turn positive, the EC says.

The inflation rate is projected to rise up to 1.6% in 2018 while in 2019 it is expected to be at 1.5%.

Downside risks to the forecast come from the external side. "A slowdown in some of Croatia's main EU trading partners could dampen goods exports, while tourism could suffer more severely than expected from intensified competition in the Mediterranean."

"Positive risks may come from investment, should there be a more substantial pick-up in the absorption of EU funding."

Government surplus declining as contingent liabilities materialise

After recording a first-ever surplus, of 0.9% of GDP in 2017, Croatia's public finances remain in good shape in 2018. "Revenues are growing strongly on the back of positive labour market developments and retail spending. Expenditure is pushed up by rising public sector wages, partly offset by declining debt servicing costs and lower-than-anticipated public investment."

"The materialisation of contingent liabilities (government guarantees to the shipyard industry) in excess of 1% of GDP is expected in 2018-2019. Largely due to this, the surplus is set to drop to 0.2% of GDP in 2018. In 2019, revenue is expected to grow slower than nominal GDP due to the effects of the forthcoming tax reform, which will cut VAT, personal income taxes and social contributions," the report says.

"Expenditure growth should remain contained, largely due to the strong base effect of the rising wage bill and capital transfers in 2018. The surplus is thus expected to increase to 0.4% of GDP in 2019 and fall again to just above balance in 2020, largely on account of public investment growth. In structural terms, the general government balance is projected to fall into negative territory this year and deteriorate thereafter," it adds.

Driven by surpluses and GDP growth, the debt ratio is set to continue declining strongly - to 73.5% of GDP in 2018, 70.1% in 2019 and 68.2% in 2020. Risks to this forecast include the possibility of greater-than-expected capital transfers to distressed companies, the Commission said.

EC projections similar to those of other analysts

Most domestic and foreign analysts expect a slight slowing of growth this year from last year's 2.9%.

The Croatian National Bank has recently revised down its growth forecast for this year to 2.7% from 2.8%, while the European Bank for Reconstruction and Development expects the Croatian economy to grow at a rate of 2.7%.

The most optimistic are analysts at Addiko Bank and the Zagreb Institute of Economics, who expect growth of 3%, while Erste Bank has forecast the growth rate at 2.8%. Raiffeisenbank Austria has revised up its growth projections from 2.3% to 2.6%.

The government drew up the budget for this year on a growth projection of 2.9%.

The Croatian GDP rose by 2.5% in the first quarter of 2018 compared with the same period of 2017, while in the second quarter it grew by 2.9%.

Text: Hina

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