In 2015, the economy grows by 0.5 percent, and in 2016 by 1.1 percent

Driven by favorable developments in the economic sphere in the first half of this year and the latest available indicators for the third quarter of 2015, analysts from the Economic Institute, Zagreb, in the latest issue of the publication Croatian Economic Outlook Quarterly, announce a positive growth rate of 0.5 percent for 2015 and a stronger growth of 1.1 percent in 2016.

On one hand, such expectations are a result of positive forecasts for economic growth in the environment, particularly in the Eurozone. On the other hand, developments in the domestic market are more favorable than previously expected, primarily relating to a slight increase in personal consumption and a significant recovery in investments. Additionally, indicators in the labor market point to a reversal of the negative trend.

However, the publication warns that economic developments until the end of this year, as well as in the first part of the next, will be significantly marked by parliamentary elections. Although the final date of the elections has not yet been confirmed, the pre-election campaign is in full swing, which means that state finances are currently more focused on the upcoming elections than on adhering to excessive deficit procedures, i.e., curbing the deficit and public debt.

At this moment, the law that should resolve the issue of loans in Swiss francs and proposals for various laws that are in process, e.g., changes to the social welfare law, seem more like populist measures than actual reform moves. Accordingly, the expected decision of the Government is not to adopt a budget for 2016 but only a decision on temporary financing. Although certain indicators from the Ministry of Finance indicate an improvement in the state of public finances, due to the lack of official, consolidated, and comparable data for the period after the first quarter of 2015, the actual state of public finances is, in fact, unknown. In this context, meeting the targets from the Excessive Deficit Procedure for 2015 and 2016 does not seem realistic, and a deficit of 5.5 percent of GDP is forecasted for 2015, with a moderate reduction to 5 percent in 2016.

Although negative growth in credit activity is expected in 2015 due to the financial weakness of households and businesses on the demand side and weak growth prospects on the supply side, with a slight recovery in lending only in the following year, the final resolution regarding loans in Swiss francs and the financial consequences it will bring will have a significant impact on the movement of credit activity.

Particular attention in this issue of the Croatian Economic Outlook Quarterly is devoted to the significant outflow of population abroad since the beginning of the crisis and the possible long-term negative consequences of this phenomenon. According to official statistics, in 2014 alone, more than 21,000 people moved abroad, with the largest number (60 percent) going to European Union countries, primarily Germany. It is additionally concerning that the largest share of emigrants is in the primary working age, with 45 percent of all emigrants in 2014 being between the ages of 25 and 45. Although such movements temporarily reduce unemployment and thus improve labor market indicators, they could jeopardize potential economic growth in the long term.

The publication also contains an analysis that examines the extent to which the institutional implementation of market-oriented laws has influenced economic growth in Croatia. The OECD market regulation indicator is taken into account, and the level of market regulation in Croatia is analyzed in comparison with the OECD and other comparable countries, as well as its impact on economic growth. Croatia has the most unfavorable market regulation indicator compared to comparable countries.