ZAGREB, May 3, 2018 - The European Commission expects the Croatian economy to grow at a rate of 2.8%, sticking to the forecast it made three months ago, and the Commission assesses that the growth is based on rising personal consumption and investments, whereas the developments surrounding the ailing private Agrokor company still pose a risk to be a headwind to growth.
The European Commission's Spring Forecast reads that Croatia's growth could be slowed down to 2.7% in 2019.
"Croatia's economic activity lost some steam at the end of last year, weighing on the still positive growth outlook for 2018 and 2019," reads the report issued on Thursday. "A pickup in investment is set to support the pace of growth, while private consumption remains robust. Strong employment growth helps to keep the unemployment rate on a fast-declining path. The general government balance is projected to remain in surplus, leading to further reductions in the debt ratio."
Underscoring the marked slowdown in late 2017, the report reads that "following three solid quarters, the last quarter of 2017 was weighed down by a marked decline in the take-up of EU investment funds, particularly in the public sector." "Together with the impact of the Agrokor crisis, this resulted in a slowdown in investment in 2017 and lower-than-expected real GDP growth of 2.8%," according to the Spring Forecast.
The Commission and economic analysts initially put Croatia's growth in 2017 at 3.2%.
"Overall, the rate of growth is likely to have peaked, and is expected to slightly moderate over the forecast horizon. The economy, however, remains on track to reach its pre-crisis volume of output in 2019. With strong employment growth and rising wages (evidenced by administrative data), outbound migration is expected to ease."
The Commission also warns about the forecast risks arising from results of the Agrokor creditors’ settlement agreement, which is still pending. "A successful outcome could increase production and investment in the group and its suppliers, while a failure to agree a final settlement could result in financial and operational disruptions."
"A slowdown in goods exports that started at the end of last year has continued in the first months of 2018, in line with weaker industrial production data." "At the same time, positive readings in consumer sentiment and solid retail trade data indicate sustained growth of private consumption, while promising early booking indicators and growing pre-season arrivals signal another strong tourist season. However, due to the significant import content of final demand, imports are projected to continue detracting from GDP growth," according to the report.
Real GDP growth is expected to remain at 2.8% in 2018 and to moderate to 2.7% in 2019. Private consumption is expected to drive growth over the forecast horizon due to continued wage and employment growth and increasing remittances from Croatians working abroad, in an environment of low inflation and falling interest rates.
A sizeable pickup in project contracting toward the end of 2017 should give rise to higher EU-funded capital spending this year and next, particularly in the public sector. Despite ongoing deleveraging, credit flows to the corporate sector are slowly picking up as financing conditions improve. "Overall, investment is projected to contribute more strongly to growth than in recent years," the report underscores.
Goods exports are projected to progressively slow this year and next, despite solid external demand and further, albeit more modest, market share gains.
Tourism is projected to continue posting strong figures, also on account of growing arrivals outside of the main season thanks to sizeable investment in the hotel sector in recent years.
As domestic industrial production lags, imports are projected to grow again faster than exports, with a negative impact on the external balance of goods and services, despite improving terms of trade. The negative balance of primary income is also set to deteriorate mostly on account of higher profits in the banking sector. The current account surplus is thus projected to drop below 3% of GDP in 2018, and to decrease further in 2019.
The full effects of last year’s public sector wage increases are kicking in this year. Coupled with reported labour shortages in tourism and construction, wages are projected to rise steadily over the forecast period. Productivity is expected to increase at broadly the same pace, leading to stabilisation of unit labour costs. Inflation remains subdued, as price movements in the volatile components of food and energy are expected to largely offset each other. "Overall, the inflation rate is projected to remain at 1.4% in 2018 and increase slightly next year," the Commission said.
It also forecasts that Croatia's debt ratio will continue declining "as government balance remains positive."
