ZAGREB, July 12, 2018 – The European Commission has downgraded Croatia’s expected economic growth for this year to 2.6% after previously forecasting a growth of 2.8%, adding that growth for the remainder of the year would be impacted by domestic consumption and that the risk of the ailing Agrokor food and retail conglomerate has been reduced.
In its summer forecast released on Thursday, the Commission estimates that Croatia’s Gross Domestic Product (GDP) in 2019 could slow down to 2.5%. “Following the unexpected slowdown in the last quarter of 2017, real GDP growth edged up only slightly in the first quarter in 2018, mainly thanks to robust private consumption and recovering investment,” the EC said in the report.
Croatia’s economic grew in Q1 of 2018 by 2.5% on the year, which faster than the growth of 2.2% recorded in Q4 of 2017.
Nevertheless, and despite mixed signals from high frequency indicators, positive labour market developments and survey data suggest that domestic demand will fuel a growth pick up over the rest of 2018, the Commission says. “Private consumption is expected to remain the main driver of growth throughout the forecast period, supported by rising household disposable incomes and low inflation. An improved uptake of EU funds, decreasing interest rates and increasing credit flows to the corporate sector should underpin investment growth. Available early data on tourist arrivals and overnight stays support expectations of a strong growth of services exports in 2018, ” the report says.
At the same time, the sudden slowdown of goods exports in early 2018 is in line with the weakening observed in the manufacturing sector. According to the national statistical office’s data, in the first five months of this year, industrial production fell by 0.2% y-on-y. Croatia’s goods exports increased by a slight 1.2% in the first five months of the year while at the same time, imports increased by 4.7% on the year. “However, the impact of expected lower goods export growth on GDP should be partially offset by a slowdown in import growth, as domestic production is import intensive, the EC says.
Noting that the settlement plan was adopted by creditors in the struggling Agrokor conglomerate, the EC underscores that it has reduced the negative risks in the period being forecast adding that the successful implementation of the plan is essential to the group’s operational and financial stability.
“Labour market conditions continue to improve. Wages are projected to continue to rise, as labour shortages become more apparent in the tourism and construction sectors. The unemployment rate should continue declining mainly thanks to rising employment, as outbound migration flows slow down. In the first five months of 2018, inflationary pressures remained contained, despite rising energy prices. Strong consumer spending and rising wages are expected to eventually drive consumer price inflation up to 1.6% in 2018 and 1.8% in 2019.”
Most local and foreign analysts expect a mild slowdown in Croatia’s economic growth compared to last year’s growth of 2.9%.
The Croatian National Bank’s (HNB) forecasts the country’s growth at a rate of 2.8% as does the International Monetary Fund (IMF), while the European Bank for Reconstruction and Development (EBRD) expects the national economy to grow at a 2.7% rate and the World Bank has forecast a growth of 2.6%.
Addiko Bank analysts are the most optimistic and have said that Croatia’s GDP should grow by 3%, while the Erste Bank estimates a growth of 2.8% and analysts at Raiffeisenbank Austria (RBA) set it at 2.3%.
The government has defined its budget based on an estimated growth of 2.9%.
