Croatian GDP Decline of 2.5 Percent Exceeds Expectations

The State Bureau of Statistics announced today that the gross domestic product in the first quarter of this year fell by 2.5 percent compared to the same period last year, which is a greater decline than expected, but also the lowest rate of decline since the beginning of last year when the Croatian economy plunged into recession.

Nine macroeconomists who participated in the Hina survey estimated that the economic decline in the first three months of this year ranged between 1.2 and 2.5 percent. On average, they expected a GDP decline of 2 percent."The decline in investments and personal consumption is the main reason for the greater decline in GDP than expected. On the other hand, the growth in exports prevented the decline from being even larger. Exports in the first quarter were influenced by an unusually large export of ships, which is unlikely to be repeated in the second quarter. The rise in oil prices affected the increase in the export of petroleum products, but also helped retail trade not to record a larger decline. The growth in exports is also attributed to fiscal incentives in our most important foreign trading partners, which will diminish in the future. Therefore, I expect a larger decline in the second quarter than in the first, by 2.8 percent, which is also indicated by a sharp 6.6 percent decline in industrial production in April, after production stagnated in the first quarter," says Hrvoje Stojić, head of the Economic Research Department at Hypo Alpe Adria Bank.

Stojić expects a technical exit from recession, meaning the first annual GDP growth, only in the last quarter of this year, while he anticipates a decline in the economy of approximately 2 percent for the entire year of 2010."The data on the GDP decline of 2.5 percent primarily shows the weakness of domestic factors of economic growth, mainly personal consumption. We can expect its stabilization only in the second half of the year, when we will see the effects of changes in the income tax system," notes Zdeslav Šantić, chief economist of Splitska Bank. This year, Šantić also expects significantly lower capital investments, mainly due to the cost of capital and low levels of optimism in the private sector, but also because the central and local governments will cut their capital investments to reduce pressures on the growth of the budget deficit. "I expect the largest decline in capital investments precisely from local governments, as their base was high last year due to local elections. Changes in the income tax system will also negatively impact this year’s revenues of local authorities," assesses Šantić.

The salvation of the domestic economy this year primarily lies in the growth of demand from foreign markets, that is, through the export of goods and services, states Šantić."However, unfortunately, the structure of the domestic economy is not as favorable as that of the Czech and Slovak economies, so it cannot significantly benefit from the recovery in the eurozone," says Šantić. However, he also notes that these external growth factors are now questionable due to the Greek debt crisis and the need for fiscal consolidation in the eurozone to be implemented much faster than originally planned, which could jeopardize the recovery of that region. Šantić expects a technical exit of the domestic economy from recession in the third quarter and maintains his earlier estimates of a GDP decline of 1.4 percent for this year. Although greater than expected, the 2.5 percent decline in the economy in the last quarter is the smallest since the recession began last year, primarily as a result of the sharp decline in GDP last year. In the first quarter of last year, GDP fell by 6.7 percent, and in the last quarter by 4.5 percent. Overall, the economy weakened by 5.8 percent last year. Most analysts also expect a GDP decline this year. Of the nine macroeconomists who participated in the Hina survey, seven estimate that the economic decline in 2010 will range between 0.5 and 2.0 percent, while only two expect growth, up to a maximum of 1 percent. On average, they expect a GDP decline of 0.7 percent.(H)