Very mild economic growth could continue in the third quarter

The first estimate of the decline in real GDP in the second quarter by 0.7 percent year-on-year and the seasonal adjustment by the Croatian National Bank (HNB) indicate that very mild economic growth was achieved in the second quarter compared to the first three months, and available high-frequency indicators suggest that very mild growth could also be achieved in the third quarter, as highlighted in the statement from the Croatian National Bank following today’s meeting of the HNB Council.

The Council, at a meeting chaired by HNB Governor Boris Vujčić, reviewed the latest economic and monetary indicators, the report on the management of international reserves and the financial operations of the central bank in the first half of this year, as well as the report on the state of the banking system in the second quarter of this year.

The first estimate of the annual rate of change in real GDP for the second quarter of 2013 published by the Croatian Bureau of Statistics (DZS) (a decline of 0.7 percent) and the seasonal adjustment by the HNB show that very mild economic growth was achieved in the second quarter compared to the first three months, according to the central bank.

Such movements, they emphasize, are primarily a reflection of the growth in exports of goods and services, particularly the export of ships, tourist services, and food products to the CEFTA market (from which Croatia exited upon joining the European Union), thereby attempting to mitigate the application of customs restrictions introduced at the beginning of July. During the same period, a strong one-time increase in imports was also recorded, mainly due to changes in excise duties and conditions of international trade following Croatia’s entry into the EU.

Available high-frequency indicators suggest that very mild growth could also be achieved in the third quarter, as stated in the announcement.

Muted inflationary pressures

The central bank also emphasizes that inflationary pressures in the domestic economy remain muted. In July, consumer prices decreased by 0.6 percent compared to the previous month, primarily due to the seasonal decline in prices of clothing and footwear as well as prices of vegetables and fruits. The decline in consumer prices in July was mitigated by the increase in tobacco prices due to the rise in excise duties.

During June, July, and August, the expansive orientation of monetary policy continued, maintaining high liquidity in the domestic banking system, thus overnight interest rates remained at a low level.

On the international front, risk aversion increased, resulting in a rise in the risk premium for most European emerging markets (the largest increase in premiums was recorded by Hungary and Croatia). The financing costs for most parent banks of the largest domestic banks also slightly increased, as stated in the announcement.

The HNB also points out that monetary movements in June and July were marked by an increase in total liquid assets, contributed by the seasonal increase in the money supply as well as savings and time deposits. The increase in total liquid assets was accompanied by a seasonal improvement in the foreign position of credit institutions, i.e., an increase in their foreign assets.

Loans from credit institutions (excluding the central government) stagnated year-on-year, with loans to enterprises showing slight growth, while the trend of deleveraging among households continued. Loans to the government continued to increase.

Deterioration in the quality of the credit portfolio

The significant decline in bank profits recorded last year and in the first half of this year is primarily a result of the deterioration in the quality of banks’ credit portfolios, namely the rise in non-performing loans and the continuation of low levels of credit activity, the central bank emphasizes.

They also state that the revenues of the consolidated central government in the first six months decreased by 1.1 percent year-on-year, while expenditures (cash basis) were 7.9 percent higher, resulting in the total fiscal deficit during this period nearly reaching the planned amount for the entire year of 2013.

The largest negative contribution to the movement of total revenues came from income tax revenues (mostly due to the non-taxation of reinvested profits since January of this year) and revenues from social contributions, while revenues from value-added tax increased due to the introduction of fiscal cash registers and the increase in commodity imports in June. The significant increase in expenditures is largely a result of debt payments in healthcare and earlier payments of subsidies to farmers, the HNB emphasizes.

The HNB Council today agreed with the decision of the supervisory board of Raiffeisen Housing Savings Bank that the president of the management board of that savings bank, Hans Christian Vallant, will serve another term, and that Franjo Franjić will remain a member of the management board, as well as with the decision of the supervisory board of Wüstenrot Housing Savings Bank that Ivan Ostojić will continue as a member of the management board.

The meeting approved the acquisition of a qualified ownership stake greater than 20 percent in the share capital of Tesla Savings Bank d.d., Zagreb, by the Autonomous Province of Vojvodina – Government of AP Vojvodina, as the legal successor of the Development Fund of AP Vojvodina, a former shareholder of that savings bank.

Hypo SEE Holding AG, Klagenfurt, received approval for the acquisition of a qualified stake greater than 50 percent in the share capital of Hypo Alpe-Adria-Bank d.d., Zagreb, as stated in the announcement from the HNB Council meeting.