Croatia with the Highest Risk Premium Among Comparable Countries

After unfavorable trends were halted in the first quarter, the available monthly data for the beginning of the second quarter still do not clearly indicate signs of improvement in current economic activity, according to the June Information on Economic Trends published today by the Croatian National Bank.

It is noted that the DSZ’s estimate of the quarterly calculation of gross domestic product in the first quarter of 2013 shows a decline in real economic activity of 1.5 percent compared to the same period the previous year, while seasonally and calendar-adjusted data indicate stagnation compared to the last quarter of last year.

The first quarter was marked by stagnation in economic activity, while the strengthening of domestic demand, mainly due to increased state consumption, was offset by a relatively strong decline in exports.

The administrative unemployment rate remained high (20.4 percent according to seasonally adjusted data), and conditions in the labor market remained unfavorable. Inflationary pressures were still subdued.

At the same time, it is warned that there was a sharp decline in industrial production in April. Industrial production, after stagnation during the first quarter at the level of the end of 2012, decreased in April in all categories except for energy production.

However, on the other hand, in April there was an increase in lending to companies along with a decrease in interest rates on short-term loans, and in May, a noticeable reduction in negative expectations of companies was recorded. Thus, the latest conducted business optimism surveys from last month indicate more favorable trends compared to the previous quarter, especially in industry. At the same time, consumer expectations are somewhat less negative than before.

Retail trade turnover increased further in March, but considering the achievements from the previous two months, the average level in the first quarter stagnated.

Analysts from the central bank warn that in the first quarter, the trade deficit, after three consecutive quarters of reduction, increased by a quarter compared to the previous quarter. This is the result of a sharp decline in exports (by 12.9 percent on a quarterly basis), accompanied by only a slight decrease in imports (0.5 percent). At the same time, foreign trade in ships significantly decreased (net exports of ships were notably reduced), while trade in oil and oil derivatives increased.

Short-term inflation indicators in April approached the level of 0 percent, indicating that inflationary pressures in the domestic economy remain subdued. The annual rate of change in consumer prices has slowed for the third consecutive month, dropping to 3.3 percent in April.

The perception of Croatia’s risk has slightly worsened, recording the highest risk premium among comparable countries at the end of the observed period.

Lending by credit institutions (excluding the central government) significantly increased in April (2.3 billion kuna), mainly as a result of growth in loans to companies (by 1.8 billion kuna).

Lending by credit institutions at the end of April increased by 0.8 percent year-on-year (excluding the effect of exchange rates, the takeover of shipyard debt, and the transfer of claims to another company).

The information states that according to preliminary data from the Ministry of Finance, the revenues of the consolidated central government in the first quarter of 2013 were 0.8 percent lower compared to the same period last year. Such trends, it is noted, are the result of a decline in revenues from social contributions, while tax revenues slightly increased.

At the same time, the expenditures of the consolidated central government increased by 4.9 percent, with the growth being mainly contributed by expenditures for subsidies (earlier payment of subsidies to farmers) and social benefits (for healthcare and pensions).

It is also noted that capital investments by the state have significantly increased, and ultimately, the total fiscal deficit of the consolidated central government in the first quarter of the current year amounted to 5.8 billion kuna (almost 40 percent of the planned deficit for 2013), which is 1.6 billion kuna more than in the same period of 2012.

The deficit was mainly financed through borrowing. The debt of the central government increased by 5.2 billion kuna during the observed period, amounting to 180.7 billion kuna at the end of March.