World Bank: Croatia Still in Recession This Year, Growth in 2014

For Croatia, as well as for the entire region, 2013 will be another difficult year, with an expected decline in Croatian GDP on an annual basis of 0.4 percent, but by the end of the year, a ‘detachment’ from the bottom can be expected, that is, the beginning of recovery, which would enable Croatia to achieve economic growth of 1.5 percent in 2014, according to the World Bank’s forecast presented today in the ‘EU11 Regular Economic Report’.

Thus, according to the World Bank’s forecasts, only three countries in the EU11 area (new EU members and Croatia) will be in recession this year, namely Slovenia, the Czech Republic, and Croatia, where the decline in GDP continues for the fifth consecutive year.

Such economic developments in Croatia have led to a further deterioration of the labor market situation, said Sanja Mađarević Šujster, senior economist at the World Bank for Croatia, emphasizing that the unemployment rate, as well as the increasingly lower participation rate in the labor market, have reached a critical level. However, she added, the number of employed in the first quarter of this year has increased compared to last year, so it can be said that the inflow into unemployment is stabilizing, although it remains a concerning fact that youth unemployment is rising, despite government measures aimed specifically at them.

Among the positive developments in 2012, Mađarević Šujster highlighted the fact that a surplus on the current account of the balance of payments was recorded for the first time, but, she warns, this is not due to a significant increase in exports, but rather a result of a substantial contraction in imports due to lower personal consumption and reduced investments, which have led to a decline in the import of capital goods.

Additionally, she stated, there are slight signs of recovery from the deepest crisis – construction has recorded a slight recovery over the past two quarters, industrial production has ‘detached from the bottom,’ and no further contraction is expected.

However, at the same time, public debt continues to grow continuously since 2008 and now amounts to nearly 70 percent of GDP, if guarantees are included, or close to 60 percent of GDP without them, which is also the level set by the budget law as a limit that must not be exceeded. Therefore, it is necessary to strengthen fiscal consolidation, especially on the expenditure side.

The World Bank thus recommends that Croatia continue fiscal consolidation, and Mađarević Šujster emphasized social benefits, which are at a level of about 3 percent of GDP, which is higher than in some wealthier EU member states. According to the World Bank’s estimates, these benefits in Croatia reach only 10 percent of those in need, which allows for more effective distribution.

Furthermore, she added, EU funds should be utilized for financing capital expenditures, but it should be noted that it is necessary to create fiscal space for their absorption, as approximately 1 percent of GDP is needed annually for pre-financing and co-financing projects from EU funds.

With the measures proposed by the World Bank, Croatia should restore its investment credit rating and take advantage of the favorable situation in the global financial market, where, due to monetary easing in 2012, there is a lot of money available under favorable conditions, but this will not last long, said Mađarević Šujster.