In 2007, annual growth of 6 percent

The Croatian economy continues to accelerate, with GDP growth of 6.6 percent in the second quarter of this year, and an average annual growth of 6 percent expected by the end of the year, primarily driven by strong personal consumption, but also by a gradual strengthening of investments.

This is stated in today’s press release from the Zagreb Institute of Economics (EIZ) on the occasion of the release of the new issue of the publication Croatian Economic Outlook Quarterly, which indicates that the Institute expects solid, but somewhat slower growth of the Croatian economy in 2008, at 4.9 percent. The high economic growth rate of 6.6 percent in the second quarter is largely a result of increased personal consumption, while investments have recorded a slowdown compared to the first quarter. The increase in personal consumption is supported by the growth of disposable household income, which is a result of positive trends in the labor market, increased government transfers to households, and still strong lending to the population, according to EIZ.

EIZ forecasts indicate a continuation of positive trends, although a certain slowdown in economic activity is expected in the second half of the year, especially in 2008 – GDP growth is expected to be 6 percent this year and 4.9 percent in 2008. The main sources of growth are not expected to change significantly, although somewhat lower personal consumption is anticipated next year, partly as a result of lower debt repayment to pensioners, and partly due to the effects of measures by the Croatian National Bank aimed at slowing down the growth of lending, the effects of which will be fully visible next year. Namely, EIZ points to relatively strong monetary expansion in the first half of the year, although measures by the Croatian National Bank aimed at limiting the growth of loans from commercial banks have begun to yield results.

They emphasize that total loans in August were 18.4 percent higher than in the same period last year, indicating a slowdown that is mainly visible in the corporate sector. It is added that these measures have an effect on reducing foreign borrowing by commercial banks and slowing down the growth of total loans, but direct borrowing by companies abroad is increasing. Despite this, EIZ expects that alongside investments, personal consumption will remain the main driver of economic growth, and they also note that it is certain that the elections will affect the growth of government consumption through higher transfers to the population and public investments.

The continuation of strong imports of goods and services associated with strong domestic demand will affect the retention of high vulnerability of the economy to external shocks, and EIZ expects a current account deficit of 7.3 percent this year and 7 percent next year. As risks related to achieving projected trends, EIZ cites risks related to possible changes in economic policy after the upcoming elections, although these are largely limited by the process of Croatia’s negotiations for EU membership.

“In addition, there are increasingly strong risks related to fiscal policy. To achieve greater stability in the long term, it is necessary to increase the efficiency and effectiveness of public spending. Although foreign borrowing by banks is restrained by central bank measures, companies are now taking the lead role in the growth of foreign borrowing, thereby increasing the external vulnerability of the economy,” EIZ states.