ZAGREB, December 21, 2018 - Investments and personal consumption will be the main levers of GDP growth in Croatia in 2019, when economic growth is expected to slow down from the current rate of 2.8% to 2.6%, it was said at a presentation of the latest Croatian Banking Association (HUB) publication on the most important economic and financial trends and expectations for 2019.

The previously forecast increase in real GDP of 2.7% for 2018 was raised by 0.1 percentage point at the end of the year, to 2.8%. Economists evidently expect some cushioning mechanisms to become active on the domestic market, with internal growth reserves awakening, the HUB publication says.

"In 2019, we expect GDP growth in Croatia to slow down mildly, to 2.6%. The pace of investment growth will determine the growth rate," said Zagrebačka Banka chief analyst Hrvoje Dolenec, one of the six members of the HUB Chief Economists Club, made up of the chief economists of the six biggest banks active in Croatia.

Personal consumption will continue to be the main driver of economic growth in 2019, but the economists point to investments as the most important factor. Personal consumption is expected to grow by 3.1%, and investments by 6%, with investment growth estimates ranging from 3.6% to 6.7%.

Dolenec said that the very positive expectations regarding the state budget had been slightly shaken by the prospect of enforcement of state guarantees for the Uljanik shipbuilding group. So, instead of a small surplus this year, a slight budget deficit is expected but that does not significantly change Croatia's fiscal status, which is still good and has a positive effect on how the country is viewed internationally, he said.

Dolenec believes that Croatia is likely to return to the investment rating.

As for investments in 2019, Dolenec mentioned revived activity in the construction sector, with companies in that sector being very optimistic about 2019.

Dolenec also underlined EU funds and data from the Regional Development and EU Funds Ministry which shows that in the last two years the value of contracted projects to be implemented had increased 500%, but he warned that their fast implementation was crucial for GDP growth.

As for obstacles to growth in 2019, Dolenec underlined imbalances on the domestic labour market - a great demand for employment in some sectors on the one hand and on the other, insufficient labour supply, primarily in the tourism, IT and construction sectors, as well as in healthcare.

Analyst Velimir Šonje of Arhivanalitika said that the external risks that could slow down Croatia's economic growth were protectionism, namely the lack of a trade agreement between the USA and China, oscillations on emerging markets, and the slowing down of China's economic growth. Dependence on China is great around the world, and the slowdown in China can reflect on important exporters, which is why expectations in Germany, too, have been significantly revised, said Šonje.

HUB director Zdenko Adrović said that interest rates on loans had been declining for the past several years. Over the last three years, interest rates on housing loans have dropped from an average 5.7% to 3.45%, while interest rates on consumer loans have dropped from 6.5% to 5.6%. Another important group of loans, long-term corporate investment loans, have seen a drop in interest rates from 5.8% to 3.6%. "Those are favourable factors with which Croatia is entering 2019," Adrović said.

More news on the GDP growth in Croatia can be found in our Business section.

ZAGREB, December 18, 2018 - The Croatian National Bank (HNB) forecasts Croatia's economic growth in 2018 and in 2019 at the rate of 2.7%, the central bank's governor, Boris Vujčić, said at a news briefing in Zagreb on Tuesday.

We expect the growth to be at the same rate as this year, 2.7%, however, downward risks are prevailing, the governor warned.

The main contribution to the growth will come from personal consumption, which is likely to rise from the expected rate of 3.2% this year to 3.5% in 2019.

Vujčić went on to say that gross fixed capital formation could be markedly intensified from this year's projection of 3.7% to 6% in 2019, provided that state investments rise on the back of a stronger absorption of EU funds. Investments are vital, as they lay the ground for sound and sustainable growth, he added.

Considering the labour market, the HNB expects employment to grow and, in parallel, unemployment to fall to a record low 7.2%. This year, employment is set to rise at the rate of 2.4% and a further 1.8% in 2019.

The HNB expects the inflation rate to slow down from 1.5% in 2018 to 0.9% in 2019.

Commenting on the conditions for borrowing, Vujčić said that favourable trends continued to be present. Interest rates on loans are falling and interest rates on state borrowing are around zero thanks to high liquidity on the financial market, Vujčić said.

The HNB continues conducting its expansionary monetary policy in order to sustain high liquidity of the system in parallel to a stable kuna-euro exchange rate. For this purpose, the HNB will continue implementing interventions on the foreign currency market, according to Vujčić.

The latest foreign exchange intervention by the central bank was conducted on Monday, when it purchased 457.7 million euro at the average exchange rate of 7.397965 kuna per euro, thus injecting some 3.39 billion kuna in the system, Vujčić told reporters. This was the second fine-tuning operation of this kind in December and the fourth so far in 2018.

The average excess liquidity in the domestic currency in the first eleven months of 2018 totalled 24.6 billion kuna, or 9.4% of GDP.

Gross foreign reserves stood at 17 billion euro at the end of September, 1.3 billion more than at the end of 2017.

More info on Croatia’s economic growth can be found in our Business section.

ZAGREB, November 29, 2018 - Digitisation of Croatia could increase its gross domestic product (GDP) by 8.3 billion euro by 2025, according to the findings of a survey presented on Wednesday by the McKinsey Croatia.

If Croatia were to focus on digitisation and automation as of tomorrow already and start working on it, by 2025 the potential incremental GDP from a digital economy could be 8.3 billion euro, Tomislav Brezinščak of McKinsey&Company said presenting the survey results.

"If we look at the past five years, Croatia's growth was 12%, which a little less than growth in EU member states in central Europe but it is still significantly a higher growth than in some large EU economies and in digital leaders," Brezinščak said. He said that Croatia was not lagging far behind other EU member states, however, when compared to developed economies, there is an obvious big gap, when measured by GDP per capita.

Compared to advanced economies, Croatia's GDP per capita is as much as four times lower.

He noted that today there are two types of economies – traditional and digital. Croatia's share in the digital economy is 5%, less than in other countries. However, that is not the main problem but rather, when comparing growth in digital economies and traditional ones. "Croatia is the only country in which traditional economy is growing faster than the digital one," he said, adding that a digital economy is the main factor of economic growth.

He added that with regard to employment, with automation today's manual, repetitive jobs will be replaced by jobs that a more productive, creative and lead to a great economic value.

Brezinščak said that it is necessary to start organising retraining for productive vocations that digitisation provides. "We don't have a good education, our infrastructure isn't the best, people find it hard to accept new skills and an entire infrastructure related to improving and accelerating new businesses for a digital economy doesn't exist," he warned.

He added that Croatia has to focus its digitisation based on three existing favourable factors. "The first fact is that Croatia has a large number of students graduating in ICT, next the cost of labour in the ICT sector has a strong competitive advantage and we have representative examples of it in the public and private sectors," he underscored, presenting recommendations for digitisation in Croatia.

For more on Croatia’s GDP, click here.

ZAGREB, November 28, 2018 - The head of the national statistical office (DZS), Marko Krištof, said on Wednesday the good tourist season, also owing to the FIFA World Cup, resulted in higher-than-expected economic growth rates. The DZS today released an initial estimate of GDP showing that the Croatian GDP grew by 2.8% in Q3 2018, compared to Q3 2017. The rate was lower than in Q2 but higher than anticipated. This was the 17th quarter in a row that GDP grew, albeit at a slower rate than in Q2, when it grew by 2.9% year on year. Eight analysts polled by Hina predicted the growth would be 2.3%, their forecasts ranging from 2.2 to 2.5%.

"The expectations were that the growth would not be as high as in the previous period, but the good tourist season, probably also owing to the football world cup, increased the growth rates," Krištof said at a press conference.

Broken down by component, the biggest contribution to GDP in Q3 came from higher exports of goods and services. Krištof said this was in line with forecasts as tourism's share was the strongest in Q3.

The contribution of domestic demand was also positive and, of its components, household spending, which grew 2.7% on the year, had the strongest impact on economic trends.

Gross added value in Q3 went up 2.2% year on year in real terms and the biggest contribution came from retail and wholesale, which grew for the 49th month in a row.

The biggest contribution to the volume decrease was recorded in manufacturing, first and foremost due to a production volume decrease in shipbuilding.

Marked growth, of 7.1%, was recorded in construction. All sectors except industry, mining and extraction recorded positive growth rates.

According to seasonally adjusted data, Croatia grew faster than the European Union average for the third quarter in a row. Excluding the one quarter in which growth was somewhat slower, Croatia would have had a faster yearly growth for 13 quarters in a row, said Krištof. The EU growth average is 1.9%.

Croatia recorded a twice as fast growth also quarterly, 0.6% as against 0.3%, which again was the third straight quarter in which Croatia grew faster than the EU average.

Commenting on the latest statistics, Economy Minister Darko Horvat said on Wednesday that reducing the tax burden on the business sector was slowly yielding results.

"The processes regarding the implementation of the action plan to reduce the tax burden on the business sector are slowly yielding results," Horvat told reporters outside the government headquarters. "These processes will continue for a long time," he said, adding that similar action plans were being prepared.

He went on to say that an action plan to be presented to the government in about ten days would propose the cancellation or simplification of 322 procedures, including the cancellation or reduction of some of the non-tax levies.

Horvat said that he was confident growth projections in the first two quarters of next year, when the planned measures are to be implemented, would continue to be good.

For more on the Croatian economy, click here.

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.

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.