HNB: Nothing Indicates the Start of Recovery

According to monthly indicators, real activity in the third quarter continued to stagnate, with a good tourist season playing a positive role, HNB stated in its latest Bulletin.

Negative trends in the labor market continued, and inflation increased reflecting movements in global markets, particularly energy and food prices, according to the latest HNB Bulletin. Cumulative budget revenues continue to show significant growth, but there has also been an increase in expenditures, contrary to the original budget. The consumer confidence index continued to decline.

Monthly data for the third quarter of 2012 indicate a continuation of stagnation in overall economic activity. More favorable trends in trade activities, HNB reports, are primarily the result of spending by foreign tourists, and there has been an annual increase in the number of tourist overnight stays. The growth of industrial production compared to the previous quarter has visibly slowed down, while construction activity continued to contract. Along with the deterioration of consumer confidence, the persistently low level of business confidence and significant uncertainty in the international environment indicate that overall trends still do not suggest the beginning of a recovery in economic activity.

The growth of total merchandise exports by 4.8 percent (seasonally adjusted) in the third quarter of 2012, compared to the previous quarter, was significantly influenced by a noticeable recovery in ship exports, and there was also a slight increase in the export of oil and oil derivatives. The export of other goods stagnated. The growth of total imports (by 1.5 percent according to seasonally adjusted data) reflects increased imports of ships for refurbishment.
There was also an increase in the import of oil and oil derivatives, while the import of other goods mostly stagnated.
During the third quarter of 2012, negative trends in the labor market intensified. Employment continued to decline rapidly, and unemployment increased, following a temporary stabilization from March to June. Nominal wages have stagnated since the beginning of the year, while the purchasing power of these wages continued to decrease during the third quarter.

Consumer price inflation accelerated significantly, causing the annual inflation rate to rise from 4.0 percent in August to 5 percent in September. This primarily reflects supply-side shocks, particularly the rise in energy and food prices associated with drought in the summer months. Core inflation also accelerated, from 1.5 percent to 1.9 percent.
In the eurozone, there was a further reduction in euro reference interest rates in September and October 2012. The activation of ECB measures, which include the possibility of new purchases of government bonds, resulted in a reduction of the risk premium in European countries and emerging markets.

These movements positively affected Croatia’s risk premium. Despite this, according to these risk indicators, Croatia remains in a relatively worse position compared to most post-transition countries in Central and Eastern Europe, HNB states.

The exchange rate of the kuna against the euro in October was exposed to depreciation pressures, reflecting usual seasonal factors, but stabilized at the end of the month. Additionally, during October, banks continued to reduce their foreign debt. At the end of October, the exchange rate was 1.1% higher than at the end of September, amounting to 7.53 EUR/HRK, which is equal to the average exchange rate achieved in the first eight months of this year.
Liquidity in the domestic financial system was at a very high level during most of September and October 2012, so interest rates in the money market, after a short-term increase in August and early September, fell again at the end of October to levels seen during the first half of 2012. Thus, the weighted interest rate on overnight loans in direct interbank trading, after an increase from 1.76 percent recorded in August to 2.24 percent in September, fell again in October to 0.61 percent. At the same time, yields on kuna treasury bills and treasury bills with currency clauses were also reduced.

Monetary movements in September were marked by stagnation of monetary and credit aggregates excluding variations caused by exchange rate changes. Excluding the impact of the exchange rate, bank placements decreased on a monthly basis by 0.8 billion kuna or 0.3 percent.
The money supply (M1) in September remained almost unchanged, but a slight decline in savings and time deposits was recorded.
After a short-lived and very slight increase in August 2012, bank interest rates stabilized during September.
The increase in foreign indebtedness during the first half of 2012 was mainly driven by borrowing by the central government, but did not continue in July and August. Under the influence of deleveraging in other sectors, total gross foreign debt decreased by 0.7 billion euros during July and August, amounting to 45.8 billion euros at the end of August. The reduction of obligations to foreign creditors was primarily contributed by the usual seasonal deleveraging of commercial banks.
Consolidated central government revenues during the first eight months of the current year were 3.3 percent higher compared to the same period in 2011. Consolidated central government expenditures increased by 1 percent, although the 2012 budget anticipated a significant reduction. The total fiscal deficit was reduced by 1.5 billion kuna compared to the same period last year, amounting to 8.7 billion kuna from January to August. The deficit was mainly financed by new borrowings, so the central government’s debt continued to grow strongly, reaching 173.3 billion kuna at the end of August, an increase of 19.4 billion kuna compared to the end of 2011.