ZAGREB, 13 July 2022 - Real GDP growth could be 5.5% this year and 2.5% in 2023, while inflation could slow down from this year's 9.4% to 4.6% in 2023, the Croatian National Bank (HNB) said on Wednesday.

According to the HNB's summary of macroeconomic trends and estimates, the economic repercussions of the Russian invasion of Ukraine, the continued rise in energy and raw material prices, and the disruption of global supply chains have not seriously affected Croatia's economic growth outlook.

However, unfavourable global circumstances and pronounced inflationary pressures could have a bigger impact on domestic economic trends in 2023, when real domestic activity growth is expected to slow down to 2.5%.

The risks remain pronounced in the projected period 2022-23, with the prevalence of risks that could have a negative impact on economic growth, such as a gas embargo, food and energy price hikes, tighter financing conditions than expected, and a deterioration of the COVID situation.

HNB governor Boris Vujčić told the press that growth in Q2 this year was expected to be stronger than in Q1, when it was 7%, the tourism season was expected to make a very strong contribution in Q3, and "solid growth" was expected in Q4.

He said Q4 was much more uncertain and that for the most part, it depended on developments on the energy market, and whether there would be a gas embargo for Europe, which would significantly change the economic outlook for Q4 and 2023.

Vujčić said a recession was possible next year, mainly due to a stoppage in gas deliveries to Europe. The recession could first occur in Croatia's main trade partners, Germany and Italy, and then spill over to Croatia, he added.

As for this year's tourism season, he said arrivals were almost the same as in 2019, while accommodation and hospitality prices increased by 20 to 30%, which would point to a record tourism season financially.

Inflation in June surpasses 11%

This year's inflation of consumer prices could accelerate to 9.4%, first and foremost as a result of considerably higher global energy and raw material prices, the HNB says. On the domestic market, energy and food prices continue to increase the most, but the increase in prices of other goods and services is gradually accelerating, too.

Vujčić said inflation was expected to increase to over 11% in June, that during the summer it should be at 11% or 12%, while it was expected to start slowing down at the end of this year and especially at the start of 2023.

The growth of the main inflation sub-components is expected to slow down in 2023 and total inflation as well, to 4.6%. However, this forecast hinges on the stabilisation and, later this year, the gradual decrease in energy and raw material prices on the global market, according to the HNB.

Inflation projections for this year and the next are dominated by risks that could increase it further, including higher energy and raw material prices and a more pronounced salary growth.

Vujčić said the fight against inflation envisaged higher interest rates and that the European Central Bank announced that this could begin this month already. "I expect this to continue in the autumn."

The goal is for HNB and ECB interest rates to be the same as of 1 January 2023 and Croatia's accession to the euro area, he said.

Mandatory reserves to be reduced to 1%, no more foreign currency claim obligation

The HNB Council decided today to reduce banks' rate for calculating mandatory reserves from 9% to 5% this August and from 5% to 1% in December, which is the mandatory reserve rate in the euro area, Vujčić said.

He also decided that the minimum amount of foreign currency claims be reduced from 17% to 8.5% in August and abolished in December.

The effect of the first measure will be the release of HRK 34.2 billion in mandatory reserves, while the second will allow banks to release or differently dispose of €5 billion, Vujčić said.

Historically low interest rates

He said today's decisions would also affect interest rates by making financing cheaper for banks, so they would have fewer reasons to raise them, notably on new loans. They can reduce them further, depending on their business policy, he added. "But we'll see where we are at the start of next year."

Vujčić said interest rates in Croatia were historically low, while those in EU countries outside the euro area were considerably higher, twice as high for housing loans.

Decrease in real and increase in nominal pay

This year, employment is expected to continue to grow and unemployment to fall, with an increase in nominal and a decrease in real pay.

Vujčić said the current situation on the labour market was unusual, given that the private sector was recording a strong rise in nominal pay, about 10%, mainly due to the difficulty to find qualified labour, while wage increases in the public sector were slower.

Looking at the two sectors together, the growth in wages is somewhat lower than that of inflation, and this year real pay is expected to drop 1.5-2%, Vujčić said, adding that wage increases were expected to be at the level of inflation growth only in the private sector.

Euro area and Schengen additional incentive to foreigners to buy real estate

Speaking of the real estate market, Vujčić said property prices in Q1 were 13.5% higher year on the year and that the increase was also due to very low interest rates on savings, which are even negative in neighbouring countries, prompting foreigners to buy due to the higher yield.

The increase in property prices is also due to the government's subsidised housing scheme as well as the acceleration of inflation.

Vujčić said Croatia's accession to the euro and Schengen areas would be an additional incentive to buy real estate. On the other hand, if the rise in ECB interest rates also affects those on deposits, this rise should also reduce the incentive to buy real estate, but this can't happen overnight, he added.

Market activity could slow down due to the expected tightening of financing conditions and unfavouable income trends.

For more, check out our politics section.

ZAGREB, 7 June 2022 - Inflation in 2022 could reach 9%, which is higher than the current IMF estimate of 6%, Croatian National Bank (HNB) Governor Boris Vujčić said at the conference "Eurotransformation of Croatia", organised by Motus Media Group in Zagreb on Tuesday.

Inflationary pressure has been growing by the month, notably food prices, and the world, including Croatia, is faced with the first major wave of inflationary pressure after many years, Vujčić said.

"The invasion of Ukraine and sanctions against Russia have worsened global expectations of growth and inflation," he said, noting, however, that price growth had been recorded also before the war in Ukraine.

The upward revision of inflation projections is largely due to higher prices of oil and raw materials, which is why inflationary pressure continues to be strong, he said.

In April, the HNB revised this year's average inflation rate forecast to 5.2% after 2.6% in 2021.

Vujčić believes that Croatia's GDP growth rate this year will exceed the 2.7% forecast by the IMF. He also expects GDP growth to be strong in the second quarter of this year as well.

Most central banks in the countries outside the euro area started tightening their monetary policies already in 2021, but the HNB did not do it because Croatia is on the road to euro area membership, he said.

"The price of borrowing for Croatia has grown much less than in the countries that are not in the euro area," Vujčić said, adding that the spillover effect of the stricter conditions of financing on market interest rates was particularly evident in Hungary and Poland.

Prices of commodity imports are growing faster than prices of commodity exports and trade conditions have been deteriorating, which increases the foreign trade deficit, he said.

"Real economic activity in Croatia is nonetheless above the pre-crisis level, with growth concentrated in the services sector," Vujčić said, noting that positive trends in the national tourism sector could compensate for the negative impact of the more expensive energy products.

Personal consumption is expected to increase in Croatia in the coming period, he said, noting that euro introduction would not lead to significant price increases because the level of prices in Croatia is already relatively high, especially for food and telecommunication services.

Marić: Negative effects of euro introduction largely non-recurring 

Finance Minister Zdravko Marić said that the negative effects of euro introduction would be largely non-recurring, adding that in order to avoid most of them, one should communicate the process to citizens as well as possible.

The current inflation has nothing to do with Croatia's accession to the euro area, Marić said, repeating that the conversion exchange rate would probably be at the level set upon entry to the European Exchange Rate Mechanism II, but that it was possible it could be slightly different.

Marić said that he had talked to representatives of the retail, tobacco, and other sectors with regard to the rounding off of prices due to euro introduction, noting that cigarette prices in the European market had been rounded to the nearest 10 and not the euro cent.

"We will be monitoring the retail sector, notably food prices," he said, adding that prices in the hospitality sector and tourism would be closely followed as well.

For more, check out our politics section.

May the 18th, 2021 - The Croatian economic situation has been picking up throughout the duration of 2021's first quarter, as demonstrated by a rapid assessment of GDP done by the central bank.

As Poslovni Dnevnik/Ana Blaskovic writes, the Croatian economic situation accelerated in the first quarter of the year between the two coronavirus pandemic waves, as illustrated by the model of a rapid assessment the country's GDP by the central bank in some new information on economic trends.

Industrial production, from 0.8 percent in the last quarter of last year, accelerated to 4.5 percent thanks to the production of non-durable consumer goods. This is indicative that an upward trend was also observed across other major industrial groups, with the exception of the production of durable consumer goods, which stagnated.

The beginning of this year also brought momentum in the Croatian retail sector (6.6 percent compared to 5.9 percent at the end of the year). The data for February suggests the continuation of growth in construction activities of 3.9 percent on a quarterly basis with an increased volume of work.

With the third wave of the ongoing coronavirus pandemic then striking, the feeling of relief and cautious optimism sank in part, but not equally among everyone, which only further highlights the fact that this crisis continues to affect individual industries and sectors very differently.

Back in April, business expectations in industry improved when compared to the previous, unstable month of March, they stagnated in construction, and they unfortunately deteriorated sharply in trade and services.

One major indicator of the health of the Croatian economic situation is the (admittedly traditionally very seasonal) employment rate. There has been, at least as yet, no major change in the country's employment rate. In the first three months of 2021, the number of Croatian employees was 0.9 percent higher, and only a tenth of those employees were being covered by government measures initially introduced last year to try to preserve jobs. The domestic unemployment rate then rose to 8.5 percent in March 2021.

Monthly inflation rose 1.1 percent in the same month due to seasonal growth in clothing and footwear prices, higher excise duties were placed on tobacco products and oil became more expensive out on the global market. The Croatian National Bank stated that foreign trade also slowed down rather significantly.

After a jump in exports (of 6.2 percent) and imports (of 6.6 percent) in the last quarter of pandemic-dominated 2020, the pace of exports in January fell to 3.2 percent, while imports (mainly of petroleum products) increased by 1.8 percent. Although exports surpassed imports, due to a significantly larger import base, the foreign trade deficit increased by 6.2 percent.

For more on the Croatian economy, follow our dedicated business section.