ZAGREB, May 7, 2019 - The European Commission on Tuesday revised down its GDP growth forecast for the Croatian economy for this year from 2.7% to 2.6%, underscoring that GDP will have finally surpassed the pre-crisis level this year.

"Croatia’s economy is expected to continue growing at a moderate pace over the forecast horizon. Household consumption remains strong as disposable incomes continue to benefit from steady growth of employment and wages, in an environment of low inflation. Participation rates are projected to keep increasing gradually as more jobs are being created. Continued growth in tax revenue and contained spending growth are expected to maintain the government balance in a mild surplus and the debt ratio on a steady declining path," the EC said in its Spring Economic Forecast released in Brussels on Tuesday.

The Commission predicts that economic growth will continue to slow down to 2.5% in 2020. In its previous Interim Winter Economic Forecast in February, the Commission projected Croatia's GDP growth at 2.7% in 2019 and 2.6% in 2020.

Following last year's budget surplus of 0.2% of GDP, the EC now estimates that this year's surplus could be 0.1% of GDP and 0.5% in 2020. At the same time the share of public debt in GDP could be reduced from last year's 74.6% to 70.9% in 2019 and to 67.6% in 2020.

Economic growth in the fourth quarter of 2018 was disappointing at a mere 0.1% compared to Q3 which led to a lower annual economic growth than had been expected, which in 2018 was 2.6%, the EC underscored. The slowdown in Q4 owed to the negative contribution of net exports, as goods exports declined in the last quarter while growth of imports accelerated. On the other hand, household consumption remained strong and investment picked up, most notably in the public sector through EU funding.

At the start of 2019, good exports appear to have rebounded, while sales in the retail sector posted some of the highest monthly growth rates in recent years. At the same time, growth of manufacturing output remained volatile and imports kept expanding buoyantly, the report notes.

According to the EC, growth in 2019 and 2020 will be driven by private consumption supported by the positive labour market outlook. Low inflation and steadily increasing tourist receipts and remittances are also likely to support real disposable incomes.

Financing conditions and business expectations remain supportive of private investment, but the main push to capital formation is expected from the public sector, as shown by the pick-up in capital transfers from EU funding at the end of 2018.

Demand for Croatian exports appears to be weakening in line with the projected economic slowdown in the EU. Growth of goods exports is expected to stabilise above the low rate observed in 2018 but significantly below the high rates observed in preceding years, to 3.2%.

Growth of tourism, which represents the main component of export of services, is also expected to remain robust but also at rates below those recorded in past years. It would increasingly rely on stronger per-capita spending while increases in the numbers of overnight stays and arrivals appear to be slowing.

Inflation has been curbed by VAT cuts.

The EC forecast notes that despite the high unemployment, labour shortages in some sectors are becoming more apparent. As the labour market tightens, employment growth should moderate - after last year's rate of 2.4%, the EC expects employment to grow by 1.6% in 2019 and by 1.3% in 2020.

Nevertheless, the EC says both the number of unemployed and the unemployment rate are expected to reach their historic lows by 2020. The EC estimates that this year's unemployment rate should fall to 7.8% compared to 8.5% in 2018 and continue to fall in 2020 to 6.9%.

Real wage growth is expected to strengthen, underpinned by strong labour demand, public sector salary increases and an increase in the minimum wage in 2019.

At the start of 2019, headline inflation was kept subdued by decreasing prices of unprocessed food, mostly due to the significant reduction in the applicable VAT rates. The EC estimates that inflation could be 1% this year, down from 1.6% in 2018 and that it would accelerate in 2020 to 1.2% despite the reduction in the general VAT rate by 1 percentage point at the beginning of the year.

A possible further slowdown in external demand poses a downside risk to the forecast period. At the same time, stronger than expected transfers from EU funds could further boost domestic demand, the EC said.

More news about Croatia’s GDP growth can be found in the Business section.

ZAGREB, May 6, 2019 - In March 2019 compared with February 2019, Croatia was in a group of EU countries with the biggest decline in the volume of retail sales but it was also in a group of countries recording the biggest annual increase of the seasonally adjusted volume of retail trade, according to figures released by Eurostat, the statistical office of the European Union.

According to seasonally and working day-adjusted data, the volume of retail sales in Croatia in March was down 1.9% on the month.

In the euro area in March 2019, compared with February 2019, the volume of retail trade increased by 0.6% for food, drinks and tobacco, while automotive fuel decreased by 0.6% and non-food products by 0.4%.

In the EU28, the retail trade volume increased by 0.5% for food, drinks and tobacco and by 0.2% for non-food products, while automotive fuel remained stable.

Among Member States for which data are available, the largest increases in the total retail trade volume were registered in Lithuania (+1.7%), Portugal (+1.2%) and the United Kingdom (+1.1%).

The highest decreases were observed in Slovenia (-3.1%), Croatia (-1.9%) and Austria (-0.8%).

In the euro area in March 2019, compared with March 2018, the volume of retail trade increased by 3.0% for non-food products, by 1.4% for automotive fuels and by 0.7% for food, drinks and tobacco.

In the EU28, the retail trade volume increased by 4.4% for non-food products, by 4.1% for automotive fuel and by 0.4% for food, drinks and tobacco.

Among Member States for which data are available, the highest yearly increases in the total retail trade volume were registered in Ireland (+10.8%), Romania (+9.3%), Croatia and Luxembourg (both +8.6%).

Decreases were observed for Slovakia (-2.0%), Austria (-1.0%) and Belgium (-0.9%).

More news about Croatian economy can be found in the Business section.

ZAGREB, May 3, 2019 - Macroeconomic conditions in Croatia continue to be positive and fiscal performance is good despite sizable recent shipyard guarantee payments, but a possible slowdown in main trading partners may affect these benign conditions, reads a statement by the International Monetary Fund (IMF) team released on Thursday, after the team's recent visit to Zagreb.

"Macroeconomic conditions have remained positive. Growth is gradually moderating from its recent highs, inflation remains subdued, international reserves have increased, and public debt has been declining," reads the statement.

The IMF expects Croatia's GDP growth rate this year to be at 2.6% and inflation at 1.5%.

"Fiscal performance has been strong despite sizable recent shipyard guarantee payments. Private demand and tourism continue supporting economic activity which is also underpinned by the CNB's (Croatian National Bank) continued accommodative monetary policy. Overall, the banking sector is liquid, profitable, and well-capitalized."

“However, a possible slowdown in main trading partners may affect these benign conditions. If a slowdown were to emanate from Europe, the authorities are encouraged to let the social safety net work, before considering fiscal stimulus," reads the statement, published on the Croatian National Bank's website.

“For the last three years, macroeconomic imbalances and vulnerabilities have been steadily declining. The recently approved Convergence Program for 2019-22 projects further reduction of public debt, which is welcome. Achievement of the underlying surpluses will require continued restraint with current expenditures. EU funds need to be increasingly utilized to ramp up public investment.

“Yet, reducing macroeconomic vulnerabilities is only half the task. There is another equally important half on which significantly greater progress is called for - to raise living standards durably and make the economy more dynamic through structural reforms... These reforms must be pursued while favourable economic conditions last, to derive the maximum benefits of Euro adoption," IMF officials say.

In that regard, they consider as being of central importance efforts to streamline the state, increase labour force participation, improve business conditions, preserve the sustainability of the pension system and make the healthcare system financially self-sufficient.

As for making state administration more efficient, the IMF team says that merit-based civil servant compensation complemented by an appropriate reduction in total public employment expenditures could create room for higher public sector wages.

It also notes that decisive action is needed to divest non-essential state assets and strengthen the financial management of essential ones.

As regards an increase in labour force participation, IMF officials say that modernizing labour contracts would improve employment prospects for the young and reduce the incentive to emigrate.

"Improved child care access would facilitate higher participation from women. Reforms in education and training policies would alleviate skills’ mismatches, reduce labour shortages, and generate more jobs," reads the statement.

"It is encouraging to note recent initiatives to reduce parafiscal fees and simplify the process of starting a business. However, uncertainties and back-logs associated with legal processes are impediments to enhancing the business climate," the team says with regard to the recommendation on improving business conditions.

As for the pension system, the IMF team says that longer life-spans come with inescapably higher pension costs and that the recently passed pension reform was a vital step in acknowledging realities that cannot be put off any longer.

"Without an increase in retirement age, the State would incur sizable debts, for which the youth of today will have to pay. Alternatively, the elderly would be consigned to living on lower pensions. If the pension system is not aligned with today’s life expectancy, the range of the country’s choices will be limited between these two outcomes."

As for making the healthcare system financially self-sufficient, IMF experts say that despite increasing healthcare contributions, the build-up of arrears continues. "Concerted actions to increase cost efficiency are compatible with maintaining the existing quality of the healthcare system and need to be pursued with urgency."

The IMF team, headed by Srikant Seshadri, visited Croatia on April 23-30 for regular talks on the latest macroeconomic and political developments. They met with Finance Minister Zdravko Marić, Croatian National Bank Governor Boris Vujčić and other state officials, representatives of the private sector and civil society organisations.

The next round of consultations on Article IV of the IMF Statute for 2019 is scheduled for this autumn.

More news about Croatia and the IMF can be found in the Business section.

ZAGREB, April 29, 2019 - Economic sentiment in Croatia deteriorated markedly in April on a wave of pessimism in the retail and construction sectors, which offset the very good consumer sentiment, the latest monthly survey conducted by the European Commission showed on Monday.

The Economic Sentiment Indicator (ESI) for Croatia was 112.2 points in April, down by 3.2 points from the previous month, ending two months of increased optimism.

Retail trade confidence fell the most, by 6.7 points to 9.5 points. Construction confidence decreased by 6.2 points to 15.1 points, after reaching its highest level in March since the Commission began tracking data for Croatia.

Industry confidence contracted by 5.9 points to 5.8 points, and services confidence by 3.4 points to 22.5 points.

The only bright note was consumer confidence, which increased by 2.8 points to its highest ever level of minus 3.4 points.

Economic sentiment also decreased in the EU, with the ESI sliding by 1.5 points from March to 103.7 points.

Industry confidence and consumer confidence fell the most, by 2.3 points each. Construction confidence dropped by 1.2 points, consumer confidence declined by 0.6 points and retail trade confidence by 0.4 points. On the other hand, services confidence increased by 0.4 points.

Among the largest non-euro area EU economies, economic sentiment shrank the most in Poland and the United Kingdom, by 3.7 and 1.5 points respectively.

The ESI for the euro area also decreased markedly in April, sliding by 1.5 points from March to 104 points.

More news about Croatian economy can be found in the Business section.

ZAGREB, April 28, 2019 - A study of foreign trade involving Croatian counties shows that last year foreign trade remained strongly concentrated on Zagreb, which accounted for nearly a third of total exports and nearly half of imports, and on a small number of other regions.

According to the study, conducted by the Croatian Chamber of Commerce (HGK) and released earlier this week, Croatia exported 107.7 billion kuna worth of goods in 2018, of which 33.28 billion or 30.9% accounted for companies based in Zagreb. Imports totalled 175.5 billion kuna, and Zagreb's share was 48.9%, with companies based in the capital importing goods worth 85.8 billion kuna.

Croatia is divided into 20 counties plus the City of Zagreb as a separate administrative unit.

The study revealed that the first five largest exporting counties accounted for 53.3% of Croatia's total exports and the first ten counties for as much as 72.1%. The concentration of imports is even more pronounced as the top 5 ranking counties imported 71.5% of total imports and the top 10 as much as 83.3%.

"The value of exports generated by the City of Zagreb is 154 times that of Dubrovnik-Neretva County and the value of imports is as much as 596 times higher than that of Lika-Senj County, the county with the least imports. The value of per-capita exports in the top ranking Međimurje County is as much as 26 times higher than in Dubrovnik-Neretva County," the study noted.

Eleven counties generated a trade surplus, the highest being posted by Sisak-Moslavina County with 1.27 billion kuna. The largest deficit was recorded by the City of Zagreb, of 52.5 billion kuna, which mostly affected the national foreign trade balance as last year Croatia recorded a foreign trade deficit of 67.8 billion kuna.

More economic news can be found in the Business section.

ZAGREB, April 23, 2019 - Croatia recorded a consolidated general government budget surplus of 758 million kuna in 2018, which is 0.2% of GDP, and a consolidated general government debt of 284.7 billion kuna, which is 74.6% of GDP, according to figures released by the National Bureau of Statistics (DZS) on Tuesday.

It was the second year in a row that Croatia had run a consolidated general budget surplus, but it was lower than in 2017, and the general government debt to GDP ratio continued to decline.

The DZS submits a report on general government budget deficit and debt to the European Commission, namely to Eurostat, twice a year, in April and October, using the ESA 2010 methodology and the Manual on Government Deficit and Debt.

Last year, Croatia's consolidated general government surplus was 758 million kuna, or 0.2% of GDP, while in 2017, it was 2.9 billion kuna, or 0.8% of GDP.

Previously, Croatia recorded budget deficits, which totalled 3.4 billion kuna, or 1% of GDP, in 2016 and 10.8 billion kuna, or 3.2% of GDP, in 2015.

The 2018 surplus was the result of a further fall in the government budget balance compared with the previous year, from 2.29 billion kuna to 191 million, as a result of positive economic developments, the DZS said.

The surplus was mostly driven by the considerably improved financial result of extrabudgetary beneficiaries and public companies and by increased tax revenues.

In 2018, taxes on production and imports totalled 76.8 billion kuna, an increase of 7.2% on the previous year.

The surplus was also spurred by a decline in interest expenses, which reached 8.88 billion kuna, down by 9.1% from 2017. By comparison, interest expenses were 11.81 billion kuna in 2015, 10.83 billion kuna in 2016 and 9.77 billion kuna in 2017.

Investment grew by 33.8% from 2017 to 13.21 billion kuna.

The DZS noted that last year 2.53 billion kuna was paid for enforced guarantees for the shipyards, which led to the reduction of the surplus.

In 2018, the primary general government surplus was 9.64 billion kuna, or 2.5% of GDP, which is 23.9% less than in 2017.

At the end of last year, consolidated general government debt was 284.7 billion kuna, or 74.6% of GDP, while in 2017 it was 284.3 billion kuna, or 77.8% of GDP. In 2016, debt was 282 billion kuna, or 80.5% of GDP, down from 284.4 billion kuna, or 83.7% of GDP, in 2015.

Despite the debt increase, the share of consolidated general government debt in GDP has continued to decline in the last four years, falling by 3.2 percentage points of GDP from 2017 to 74.6% of GDP in 2018.

In nominal terms, the debt increased by 379 million kuna or 0.1%.

The rise in net borrowing (2.7 billion kuna) was almost offset by negative exchange rate differences (minus 2.3 billion kuna).

The DZS noted that the level of consolidated general government debt at the end of 2016 and 2017 was about 1 billion kuna higher than the data presented in the October 2018 notification due to further alignment with the ESA 2010 methodology.

More economy news can be found in the Business section.

ZAGREB, April 18, 2019 - The national reform programme aims to achieve three key objectives - a better business environment, connect the education system with the labour market and strengthen the consolidation of public finance, Prime Minister Andrej Plenković said at a regular cabinet meeting on Thursday.

The national reform programme, a 120-page document which the government adopted on Thursday, analyses the progress made in implementing the Council of the EU recommendations, reform priorities, economic policy measures and measures aimed at achieving the goals of the Europe 2020 strategy.

The main objective of the national reform programme is to strengthen the competitiveness of the Croatian economy, with a projected growth rate for 2019 of 2.5 percent, Plenković said.

The programme sets out three main goals - strengthening the competitiveness of the national economy, connecting the education system with the labour market and ensuring the sustainability of public finance - which should be achieved by implementing 30 economic policy measures divided into 10 reform priorities and 100 activities.

The government is required to send this document and the convergence programme to the European Commission by the end of April as part of the process of mandatory reporting and adjustment of EU member states’ economic policies to the jointly defined goals and regulations of the EU. Failure to comply results in sanctions, including "a freeze" on funding.

To improve the business environment, the government says in the programme that it will enable starting a business online and continue liberalisation of the services market and the regulatory reform by reducing the administrative burden on the business sector and cutting parafiscal charges.

The government plans to prepare a project for the construction of national next-generation broadband infrastructure, to be leased to all operators of electronic communications networks and services.

Most of the cohesion policy funding will go towards further development of the public drainage system, reducing losses in the public water supply system and ensuring that water is safe for human consumption.

The programme provides for new incentives to boost investment.

"Investment growth is a priority, the main lever for economic growth in Croatia, and new investment incentives will be introduced. The existing programme and incentives for investment in new technologies will be combined and the capacities of counties for investment attraction and promotion will be strengthened," Deputy Prime Minister for Economy and Minister of Agriculture Tomislav Tolušić said.

The reform programme provides for the adoption of a plan for the digital transformation of the economy and for establishing an independent body, the Committee on Productivity, to analyse, design and implement policies relating to productivity and competitiveness.

The government plans to improve the management and use of state property, including the business and financial restructuring of road and railway companies.

As part of the public administration reform, efforts will be made to ensure more efficient management of human resources by reviewing the wage setting system, digitising work processes, introducing quality control and further professionalisation.

The judicial system will be improved through further development of electronic communication between courts and other participants in court proceedings and by upgrading the eDelivery service and the eNoticeboard.

As for education and training in accordance with labour market needs, the focus will be on the further implementation of the curricular reform, life-long learning, and an effective and relevant higher education.

In strengthening public finance management and fiscal consolidation, the accent will be on establishing a more efficient system of financial and statistical planning and reporting on the part of extra-budgetary beneficiaries in the transport sector.

The stimulation of the demographic revival will continue with measures aimed at raising social security for families with children.

In order to encourage family leave for employed parents and improve the financial status of families with new-borns, the current 3,990 kuna family leave allowance will be increased.

The further enhancement of welfare envisages a transparent system of allowances with comprehensive records so as to better administer allowances and programmes, reduce territorial inequalities and create more effective welfare policies.

Ensuring the financial stability, viability and quality of healthcare is planned through enhanced management of human and other hospital resources, the use of IT to improve organisation, cost planning and control, and by increasing the availability and quality of health care.

Structural and organisational measures will be launched in the prevention, diagnosis and treatment of malignant diseases. According to Croatian Institute of Public Health data, 22,503 malignant diseases were recorded in 2015 and data on mortality from 2017 show that 13,638 people died of them.

The programme also contains 15 measures to achieve national goals in employment, research and development, climate and energy, education, and combating poverty and social exclusion, given that activities for achieving Europe 2020 strategy goals related to smart, sustainable and inclusive growth are implemented and overseen through the European Semester.

More economic news can be found in the Business section.

ZAGREB, April 16, 2019 - Former Croatian National Bank Governor Željko Rohatinski says in his book "Crisis in Croatia" that the country is still in a crisis and that cooperation between companies, banks and the state as well as greater engagement on the state's part are necessary to overcome it.

"In the book I analyse the development of the economic situation in Croatia from 2008 to 2018. There are indicators according to which we are coming out of the crisis. However, the accumulated problems are still of such intensity that we are actually still in crisis. Also, options are being considered as to what and who should be more active for the solution to be better and quicker. In my opinion, it's necessary to establish synergy between three important subjects: companies, banks and the state. This can't be unorganised and the state has a big role in it all," Rohatinski said at the book's launch on Tuesday.

In 2018, Croatia returned to the economic level of 2008, which was neither quick nor cheap, he said, estimating that 26 billion euro was lost in GDP in the said period as well as 180,000 jobs. The predicted GDP growth of 2.5 or 3% is not enough as it will keep Croatia at the bottom of the EU for a long time, he added.

Zagreb Faculty of Economics professor Marijana Ivanov, one of the book's consulting editors, said one of its messages was that Croatia must be the one governing change. It transpires from the book that, although we have officially come out of the crisis, we are still standing still, she added.

Drago Jakovčević, another Zagreb Faculty of Economics professor, said Rohatinski analysed the crisis also through the people most affected by it, first and foremost those who lost their jobs.

More news about the Croatian National Bank can be found in the Business section.

ZAGREB, April 12, 2019 - As many as 59% of Croatian companies think that the state of digitisation of the national economy is poor or very poor, a survey showed on Thursday.

The survey of the digital readiness of Croatian companies was carried out by the Apsolon business consulting firm, previously called Sense Consulting. It was conducted on a sample of 300 companies, including 65 large companies with over 250 employees and 235 medium-sized companies with between 50 and 249 employees, operating in different regions and industrial sectors.

The survey found that as few as 15% of Croatian companies have developed a digital transformation strategy, only 17% think they are completely ready for changes the digital transformation will bring, and 29.7% said that digital transformation is at the top of their list of priorities.

As many as 59% of the companies polled said that the state of digitisation of the Croatian economy is poor (47%) or very poor (12%), with large companies being more critical in their assessment.

On the scale of digital readiness, the Croatian economy was given a grade of 2 out of 5.

Apsolon's chief partner Vedran Antoljak said that the results of the survey were backed by the European Union's Digital Economy and Society Index (DESI), which included Croatia among less successful countries, ranking it 22nd of the 28 EU member states.

"One of the objectives of our survey is to use the results to improve the digital readiness of Croatian companies and of the economy as a whole. This can be achieved, among other things, by adjusting the regulatory framework to the contemporary digital age and introducing digitisation into industrial sectors," Antoljak said.

A comparison of the results of the survey for Croatia and a similar survey for Germany shows that only 4.5% of Croatian companies recognised the importance of digital transformation, as against 35% in Germany.

Only 9% of Croatian companies think that their employees are ready for this process, while in Germany 42% think so.

On the other hand, as many as 77% of Croatian companies said they are well-prepared for digital transformation, compared to 35% of German companies. "Considering economic circumstances, the Croatian estimate seems very optimistic," Apsolon said.

Apsolon noted that its international experience shows that companies that have undergone digital transformation have 35% higher revenues, while employee motivation and productivity is up to 40% higher.

More news about Croatia’s economy can be found in the Business section.

ZAGREB, March 5, 2019 - Croatia's gross foreign debt at the end of November 2018 totalled 39.1 billion euro, 1.9 billion or 4.5% less than the year before, analysts at Raiffiesenbank Austria (RBA) have said, noting that the foreign debt to GDP ratio is expected to continue to fall.

"The current dynamic of the annual debt decline has been going on since December 2015," the analysts said in a comment on figures recently published by the Croatian National Bank (HNB).

The reduction of the foreign debt is due to an 11.7% drop in the debt of other monetary financial institutions, a 5.1% drop in the foreign debt of other domestic sectors and a decline in the general government foreign debt of 8.2%.

The gross foreign debt of other domestic sectors at the end of November was 13.47 billion euro, continuing the trend of deleveraging that started in January 2016, the RBA analysts said in their analysis.

The general government gross debt at the end of November was 13.5 billion euro, 8.2% less than the year before.

"Negative annual growth rates were recorded for the third consecutive month. The annual gross debt growth was reported only for the central bank, of 275 million euro or 13.1%, and for direct investments," the analysts said.

They expect that data for December 2018 will indicate a continuation of similar trends and that at the end of 2018 the foreign debt to GDP ratio should be below 75%.

Owing to positive economic trends and further deleveraging in all key sectors, the RBA analysts expect the share of gross debt in GDP to continue falling this year as well.

More news on the debt issues can be found in the Business section.