High personal spending continues to support the growth of the Croatian economy, but due to the fall in industrial production and the slowdown in tourism growth, macroeconomists estimate that GDP growth slowed down in the third quarter, reports Večernji List on November 26, 2018.

The Central Bureau of Statistics (CBS) will release its first GDP estimate in the third quarter of 2018 this week, and eight macroeconomists who took part in the Hina survey estimated on average that the economy grew by 2.3 percent compared to the same period last year. Their growth estimates range from 2.2 to 2.5 percent.

It will be the seventh quarter in a row of GDP growth, but slower than in the previous one when the economy grew 2.9 percent year-on-year.

All macroeconomists polled agree that the growth of the economy is still supported mostly by personal spending, the largest component of GDP. This is evidenced by the growth in retail trade turnover on an annual basis for 49 months in a row, which has not been recorded since the CBS started collecting this data.

Consumption is also supported by tourism, which has the biggest impact on GDP in the third quarter. For this reason, in the last few years, the GDP growth accelerated in the third quarter relative to the second quarter. However, macroeconomists point out that in the third quarter of this year there was a relatively slower growth of tourism due to limited capacity and recovery of competitive markets. In 2017, according to CBS data, tourist arrivals rose by 13 percent, while the number of overnights increased by 10.6 percent. "However, in the third quarter of 2018, growth rates of tourist arrivals and overnight stays were significantly lower than in the same quarter of 2017,” the survey says.

On the other hand, industrial production was growing for years, but in the third quarter, according to the CBS data, it fell by 1.5 percent compared to the same period last year, partly due to the crisis in the Uljanik shipbuilding group. Since the end of last year, industrial production has been very unstable, so in 9 of the last 11 months, it has declined year-on-year. Therefore, in the first nine months of this year, the industrial production was 0.3 percent lower than in the same period last year.

Estimates for the third quarter are in line with expectations that the GDP growth for the whole year will be somewhat slower than in 2017 when it reached 2.9 percent. The macroeconomists estimate on average that growth in 2018 could reach 2.7 percent. Their growth estimates range from 2.6 to 3 percent, but some macroeconomists warn that they could reduce their estimates after the publication of data for the third quarter.

In a recent budget review, the government reduced its economic growth forecast for this year from 2.9 to 2.7 percent.

For more on Croatia’s economic growth, such as it is, click here.

ZAGREB, November 8, 2018 - 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 of GDP growth 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%.

For more on Croatia’s economic growth, click here.

All well-developed countries know that without innovation there is no development of society and the economy. At the same time, it is known that Croatia is at the very bottom of Europe when it comes to investments in research and development. But it seems that Croatia has decided to catch up and prepare for the future, reports Večernji List on November 7, 2018.

The government plans to set up a new national council, this time for innovation, jointly led by the Ministry of Economy and the Ministry of Science, Education and Sports. It will also include other ministers, such as the Regional Development and European Funds Minister Gabrijela Žalac and Minister of Agriculture Tomislav Tolušić, as well as representatives of the Croatian Chamber of Commerce, the Croatian Chamber of Crafts and Trades, trade unions, the Croatian Employers' Association and others.

The body should ultimately change the picture when it comes to innovations in Croatia. According to the Ministry of Science, it will monitor the implementation of the Smart Specialization Strategy and suggest its modifications. The strategy was adopted by the government led by Prime Minister Tihomir Orešković, and it has defined the most promising future sectors that should revive the Croatian economy with the help of EU funds. The strategy is based on gathering the critical mass of researchers in scientific institutions and businesses that should work together on research and development to achieve excellence in research and its commercialization. The government has also defined five areas with the greatest potential, which are health and quality of life, energy and sustainable environment, transport and mobility, security, and food and bioeconomics.

At this point, Croatia is far from where it should be. According to the Bloomberg Innovation Index for 2018, Croatia is behind all European Union countries when it comes to innovation.

According to unofficial information, the council’s first meeting will be held this Friday, chaired by Economy Minister Darko Horvat. There were suggestions that the council should be led by the prime minister himself, but the proposal was rejected.

Bojan Jerbić, a professor at the Faculty of Mechanical Engineering and Naval Architecture, argues that Croatia has a chance for technological development in the future, but that it needs radical changes, a sort of scientific and technological "new deal". “We have fantastic research groups across Croatia, but many are not involved in the overall societal development and exist separately from the society. That is something which should jumpstart Croatia. We would have fantastic results in five to ten years. We would create a number of startups, new technology companies, create completely new jobs and new economic niches that would be internationally competitive,” said Jerbić.

To read more about Croatia’s technology sector, click here.

Translated from Večernji List (reported by Petra Maretić Žonja, Iva Boban Valečić).

ZAGREB, November 6, 2018 - Finance Minister Zdravko Marić expects the new GDP growth forecast for Croatia, which the European Commission is scheduled to release on Thursday, to be similar to those issued by other international financial institutions and analysts.

"I generally don't like to speak in advance about forecasts that have not yet been published, but according to everything we hear from other international institutions, relevant analysts in the country and abroad, who all more or less gave the same projections, the growth rate should be slightly below 3%," Marić said on Tuesday in Brussels where he is taking part in a two-day meeting of EU finance ministers which started on Monday.

The Commission publishes a full set of macroeconomic forecasts for the EU and its member states in spring (May) and autumn (November). It is expected to release its autumn forecast on Thursday.

According to the latest EC projections, Croatia's GDP should go up 2.6% in 2018 and 2.5% in 2019.

The European Bank for Reconstruction and Development (EBRD) last week affirmed its forecast of Croatia's 2018 economic growth at 2.7%. The lender also affirmed Croatia's 2019 growth forecast at 2.5%.

"Following a long-lasting crisis and recession, I would say that the present growth rates are good and they are based on healthier foundations than those before the economic crisis. They, however, are not growth rates we should be happy with in the medium and long term. We need to strive to increasing the growth potential and then overall growth rates will be better too, the way we all want them to be, which will help boost employment, the standard of living and earnings," Marić said.

Asked about the effects that state guarantees, issued for the troubled Uljanik shipyard, would have on the EC's economic forecast, Marić said this was a one-off effect which is not negligible but it will not jeopardise the stability of public finances. He reiterated that he was talking about 4.3 billion kuna of enforced guarantees.

Marić is currently in Brussels where he is taking part in the Economic and Financial Affairs Council (ECOFIN) meeting. Ministers will exchange views on the digital services tax and discuss the progress achieved in the negotiations so far.

To read more about Croatia's economy, click here.

ZAGREB, October 25, 2018 - The Croatian National Bank (HNB) Council discussed on Wednesday the latest economic and monetary trends, as well as a report on the situation in the banking system in the first half of the year, adopting a monetary policy projection for the period from 2018 to 2021, and several other decisions from its remit, the HNB said in a statement.

ZAGREB, October 9, 2018 - The International Monetary Fund (IMF) expects Croatia's growth to rise by 2.8% in 2018 and to decelerate at the rate of 2.6% in 2019, according to the latest issue of the World Economic Outlook.

ZAGREB, September 27, 2018 - Next year, the Croatian economy is expected to grow roughly at the same rate as this year, or "slightly below three percent of GDP", Croatian National Bank (HNB) Governor Boris Vujčić said on Wednesday, warning of the first signs of external risks.

ZAGREB, August 29, 2018 - The Croatian Chamber of Commerce (HGK) and Croatian Employers' Association (HUP) find the Q2 GDP growth of 2.9% to be good news, however, the business community warns that that growth rate is insufficient to stop the country from lagging behind the average level of development in new European Union member states and employers also point to the lack workers as the main factor limiting further growth.

ZAGREB, August 29, 2018 - In the second quarter of 2018, the Croatian economy grew 2.9% on the year, faster than in Q1, mainly thanks to higher exports and consumption, the national statistical office said on Wednesday.

ZAGREB, August 2, 2018 - Prime Minister Andrej Plenković has said that economic and fiscal guidelines, which the government will adopt at its session on Thursday, will be a roadmap for the preparation of the 2019 budget, adding that the guidelines projected a 2.7% growth in 2019 and a 2.5% growth in 2020.