Is Croatia Facing a ‘Double-Dip’?

Croatia’s gross domestic product (GDP) recorded a growth rate of 0.2 percent in the third quarter of this year, but analysts from Privredna banka Zagreb (PBZ) currently estimate that the fourth quarter will bring a new decline in GDP at a level of around 1 percent, thus their overall assessment for 2010 remains unchanged – a decline in economic activity of about 1.5 percent.

"The fact that industrial production in October decreased by as much as 4.4 percent compared to the same month a year earlier does not instill confidence that the achieved GDP growth in the third quarter will continue into the fourth. Although there are currently very few available data that would give us better insight into developments in the last quarter of this year, our current assessment is that it will bring a new decline in GDP at a level of around 1 percent, which leaves our overall assessment unchanged that 2010 will record a total decline in economic activity of about 1.5 percent. If the fourth quarter brings a new decline in economic activity, which is currently highly probable, Croatia will find itself in a so-called ‘double dip’", emphasizes Ivana Jović in the latest PBZ Weekly Analyses.

In an analysis titled "Are We Facing a ‘Double-Dip’?", Jović refers to the first estimate from the Croatian Bureau of Statistics that GDP in the third quarter of this year recorded a growth rate of 0.2 percent, after six consecutive negative quarters. Although detailed data on the structure have not yet been published, it can be assumed that this marginal growth is a result of the tourist season which influenced the export of services, thereby maintaining a positive contribution of net foreign demand to total GDP (despite the fact that there was also an increase in commodity imports in the third quarter), as stated in the analysis.

It is added that changes in the income tax system and the abolition of the lower rate of the crisis tax likely had a certain positive impact on personal consumption trends. Given that this is the first estimate from the CBS, Jović also leaves open the possibility that the publication of the full set of data at the end of December may bring a correction to the growth rate. She also emphasizes that the usual comparison with similar EU countries shows that Croatia is still exiting the crisis at a much slower pace, as Slovakia, for example, recorded a growth of 3.7 percent in the third quarter, and Hungary 1.6 percent.

The growth of new European countries is mainly based on the growth of their exports driven by the recovery of the largest European economy – Germany, Jović emphasizes, explaining that the movements in industrial production of selected countries (Slovakia, Slovenia, and Hungary) follow the movements in industrial production in Germany, and this is also evident from the movements of new orders in the manufacturing industry. Noting that Croatia stands out as the only one of the observed countries with relatively high annual growth rates of orders, Jović asks why Croatia, based on such growth in orders, does not achieve growth in industrial production?

Probably because the growth of total orders for the Croatian manufacturing industry is based on the growth of orders from foreign clients, rather than on the growth of domestic orders, Jović points out and adds that the movement of manufacturing production actually follows the movement of domestic orders, meaning that the strong growth of foreign orders recorded throughout almost this entire year has no significant impact on total production.

At the same time, domestic demand is still of a very unstable nature. Unlike Croatia, Slovakia is far better integrated into commodity exchange and does not rely solely on domestic clients, so even the graphical representation shows a much more synchronized movement of manufacturing production and orders, Jović notes and adds that the movement of traffic in the manufacturing industry in Croatia has a distinctly negative trend compared, for example, to Slovakia, especially in terms of sales in the domestic market.  (H)