Recession Continues, GDP Decline Slows?

In Croatia, the recession continued in the first quarter of this year, marking the sixth consecutive quarter, but thanks to the growth in industrial production, the decline in gross domestic product is expected to be significantly slower than in the previous quarter.

The State Bureau of Statistics will publish next week the first estimate of gross domestic product for the first quarter of this year, which will show that the economy has contracted for the sixth consecutive quarter.

Eight macroeconomists who participated in a Hina survey estimate that the economy weakened by an average of 1.2 percent year-on-year. All expect a decline, ranging from 0.3 to 2 percent.

Although sharp, this would be a smaller decline compared to the fourth quarter of last year, when GDP plummeted by 2.3 percent, marking its largest drop since the second quarter of 2010.

The domestic economy has been weakening since the beginning of 2009. It technically emerged from the recession twice, in the third quarter of 2010 and the second quarter of 2011, but negative trends continued thereafter. Last year, GDP fell by 2 percent.

– In the first quarter, a somewhat milder decline in GDP can be expected, thanks in part to favorable hydrological conditions, which ensured an increase in energy production, thus slightly supporting overall industrial production, which recorded growth year-on-year after a long time – states one of the macroeconomists in the Hina survey.

After four years of continuous decline, industrial production increased by 1.1 percent in the first three months of this year.

The decline in the construction sector has also been halted, with construction works increasing by 1.3 percent in February compared to the same month last year, according to seasonally adjusted data from the State Bureau of Statistics.

– The decline in construction works has been halted, despite a challenging winter, thanks to infrastructure projects or local government projects in anticipation of local elections, as well as some shifts in public enterprises under the pressure of the government’s focus on public investments – it is stated in the Hina survey.

A slight, but still encouraging growth in lending has also been observed at the beginning of this year compared to the end of last year.

However, due to high unemployment, decreasing disposable income of households, and consumer pessimism, consumption continues to weaken.

In March, retail trade turnover fell for the 13th consecutive month, while the average decline in retail sales in the first three months of this year was around 4 percent, significantly higher compared to a 0.4 percent decline in the same period last year.

– The most significant impact on the decline in economic activity in the first quarter will come from personal consumption, regardless of the slightly earlier timing of Easter. A more negative impact on GDP movement compared to previous periods could also come from net exports, in line with trends in commodity exchange with abroad – states one of the macroeconomists in the Hina survey.

Due to the recession in the eurozone, our largest trading partner, demand for imported products there is weakening, which negatively affects Croatian exports. In the first three months of this year, exports fell by 7.9 percent compared to the same period last year.

– A slight increase in industrial activity and construction works is unlikely to compensate for the decline in personal consumption and exports in the first quarter – concludes one of the macroeconomists in the Hina survey.

Reduction of GDP Estimates for 2013

Due to unfavorable domestic conditions and trends in European economies, many macroeconomists and a number of domestic and foreign institutions have reduced their estimates for the Croatian economy in recent months.

Thus, eight macroeconomists in a new Hina survey estimate that GDP will weaken by an average of 0.9 percent in 2013, while three months ago they expected a decline of 0.4 percent. All expect a decline in the economy, ranging from 0.4 to 2 percent.

Recently, the Economic Institute of Zagreb also raised its forecast for the economic decline this year from 0.2 to 0.5 percent.

Many foreign institutions have also reduced their estimates for the Croatian economy. In forecasts published in April, the International Monetary Fund estimates that GDP will slide by 0.2 percent this year, while in previous forecasts last autumn, it expected a growth of 1 percent.

The European Commission is even more pessimistic. In February, it expected a decline in the Croatian economy this year of 0.4 percent, while in early May it raised its estimate of the decline to 1 percent.

However, “trends in the domestic market should be somewhat more favorable than last year’s, particularly in the second half of the year. We expect a boost to GDP movement again from a successful tourist season. However, due to the current situation in Croatia and the European Union, we do not expect a sufficient recovery in domestic and foreign demand that would lead to GDP growth,” states one of the macroeconomists in the Hina survey.

Most other macroeconomists also expect somewhat more favorable trends in the second half of the year.

– This, along with the favorable effects of the tourist season, could also be contributed to by halting negative trends in investment movements, partly due to an extremely low base, partly due to the start of realization of some of the announced but postponed projects, and also due to the fact that by entering the EU we gain access to funds from cohesion and structural funds – it is stated in the Hina survey.

However, there are also risks that this may not materialize, given that the continuation of the longest recession in the eurozone since the introduction of the euro in 1999 could negatively affect Croatian exports. Much will also depend on domestic investments.

– This year, we expect a GDP decline of around 0.4 percent, with risks that it could be larger. Personal consumption remains very low due to unemployment and falling real wages. We do not see the possibility of significant export growth, both due to the crisis in major export markets and due to the exit from CEFTA and additional import liberalization due to EU accession. Additionally, we do not see the possibility of significant realization of investments this year – it is stated in the Hina survey.