Double-Digit Drop for Croatian GDP as Europe Slides into Recession?

Lauren Simmonds

As Novac/Gojko Drljaca writes on the 21st of October, 2020, a new wave of coronavirus cases is seeing Europe slide into a double-dip recession scenario, this is the thesis with which The Financial Times has come out. A number of European governments are tightening their epidemiological measures, and an increase in the number of cases is leading to a drop in consumer optimism. What does this mean for Croatian GDP?

After reducing the number of cases during the summer, which saw the easing up of the epidemiological measures and the recovery of European economies, we’re now witnessing the continuation of the scenario which, in the event of an increase in the number of cases, envisages a prolongation of what has become the status quo and even a deepening of the recession.

Although the last session of the Croatian National Bank Council a few days ago estimated that Croatia will end the year with a GDP decline of 8 percent and that its growth of 5.2 percent is expected in 2021, we’ve since learned that the central bank is already thinking about revising their relatively optimistic estimates.

For the final conclusion, the central bank will wait and see if the Croatian Government will react with stricter epidemiological measures that could affect business activities.

Well-informed people claim that the behaviour of Croatian consumers has already started to change due to the growing number of cases of infection, which is reflected in the decline in traffic in some shopping centres and restaurants. It should be noted that the Croatian National Bank has already concluded that “during the third quarter, at the same time as the epidemiological situation worsened, signs of a slowdown in recovery became visible, with consumer and business expectations in services and industry deteriorating in September.”

According to a statement from the Croatian National Bank, the annual inflation rate in August remained in negative territory (-0.1 percent), real activities and the labour market are in a much more unfavourable situation than before the pandemic.

Although we had a good tourist season for the year with the pandemic, tourism will still bring much lower revenues in 2020. The Croatian National Bank is cautious because they consider forecasting during a pandemic to be extremely difficult due to numerous unknowns.

”We’re in a recession and it’s easily possible that in the event of the continuation of this trend of the epidemic, the recession will continue in the fourth quarter, and possibly in the first quarter of next year. Delaying the start of the recovery would deprive Croatian GDP of 1 to 2 percentage points annually. In that case, the decline for 2020 would amount to the previously expected 10-11 percent instead of 8-9 percent, as expected before the autumn wave,” said economist Velimir Sonje.

Due to the growing number of cases, the tightening of epidemiological measures has been announced by all major European countries. Germany, France, the United Kingdom, Spain and the Netherlands – all of which recorded strong growth in the number of cases of infection and all took new measures last week.

Smaller European countries facing an increase in the number of cases are behaving identically. The Czech Republic, which has recorded the largest increase in the number of cases, has reached a high level of restrictions. Belgium has announced the closure of cafes and restaurants for four weeks. As of Monday, they are introducing curfews, bans on gatherings and restrictions on the sale of alcohol.

Switzerland has expanded its obligation to wear masks. A nocturnal epidemiological curfew has been introduced in Paris since midnight on Saturday. In Catalonia, bars and restaurants have been closed in and around Barcelona. The Italian authorities are arguing over what to do: part of the government is calling for stronger measures while Conte insists the new rise in cases is not as dangerous as the first, but they will certainly come up with new measures in any case.

In Sweden, the regional authorities are left to advise citizens to reduce their overall mobility and to adhere to social distancing measures.

Fiscal exposure

Senior Allianz economist Katharina Utermohl commented on the surprising growth rate of cases across Europe and stressed that they are already seeing further economic downturn in a number of countries in the fourth quarter.

“A new recession is absolutely possible,” Utermohl said. Google’s mobility data in October again points to a significant decline in major European cities. Countries with large service sectors such as France, Spain and Portugal will once again have particularly major problems.

It is very inconvenient that the countries of the European Union have already dramatically increased their fiscal exposure this year due to the global coronavirus pandemic. The European Commission has announced a plan according to which Eurozone members are expected to have an aggregate fiscal deficit of 976 billion euros this year.

This means that national fiscal deficits will be 10 times higher than last year or those projected for this year. Although the European Central Bank’s interventions have managed to keep the borrowing costs of the most vulnerable countries (Italy, Greece) very low, the need for new fiscal interventions brings the EU into a completely unexplored territory, which some call “fiscal extravagance”.

ECB Governor Christine Lagarde warned over the weekend that fiscal stimulus should continue to be insisted on, regardless of the risks, in order to avoid “labour market hysteria” and prevent a wave of bankruptcy. The IMF also supports this thesis.

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