PBZ: Croatian economy will grow by 1.3 percent this year and in 2016

The Croatian economy is expected to achieve a significantly lower, yet still positive growth rate in the last quarter of this year, so the GDP growth for 2015 could ultimately be around 1.3 percent, and a similar rate can be expected next year, estimate analysts from Privredna banka Zagreb (PBZ).

 In the regular publication “PBZ Weekly Analysis”, analysts from the bank reflect on last week’s published first estimates from the State Bureau of Statistics regarding GDP growth in the third quarter of this year at a surprisingly high annual rate of 2.8 percent.

– Although we expected an acceleration of economic growth in the third quarter of this year to around 2 percent, the first estimate from the SBS indicating a growth of 2.8 percent exceeded our expectations.

The first estimates from the SBS indicate a significant acceleration in personal consumption growth to 1.4 percent compared to 0.6 percent in the second quarter, as well as government consumption growth to 0.6 percent from 0.4 percent in the previous quarter. However, PBZ emphasizes that the biggest surprise comes from investment growth of as much as 2.2 percent, considering that this growth was not indicated by the movement of the construction work index, while the positive contribution of net foreign demand is expected to continue in the third quarter. Namely, they explain that based on high-frequency indicators, it could be expected that the export of services, i.e., tourism, would significantly contribute to GDP growth during the observed period. Thus, the export of goods and services increased by 8 percent compared to the same period last year, while imports increased by 8.1 percent, resulting in a net foreign demand contribution of 1.6 percentage points, according to SBS data.

– Although there are very few available indicators for the last quarter, and we currently only have data that industrial production in October recorded a growth of a high 6.4 percent (calendar-adjusted index), or 4.8 percent (original index) compared to the same month in 2014, we can expect that a positive GDP growth rate will also be achieved in that quarter, although significantly lower than the growth in the third quarter due to a significantly lower impact of tourism and potential negative effects of the electoral cycle on business activity, say PBZ analysts.

Therefore, they estimate that GDP could ultimately grow by approximately 1.3 percent this year, and they do not expect significantly different trends in 2016, but rather a maintenance of the growth rate at approximately the same levels. They base their forecast on the expectation that personal consumption will experience a weakening of the positive effects of tax changes from this year and the positive effects of low price levels, which could lead to consumption being maintained at approximately the same or only marginally higher levels. 

However, they expect a significantly larger positive contribution from investment activity primarily driven by greater absorption of EU funds, “while on the domestic demand side, the greatest unknown is government consumption or the unclear manner of implementing fiscal consolidation.” As for foreign demand, although they expect its continued positive contribution, they also note that “a certain degree of uncertainty arises due to geopolitical risk and the fact that 2015 set a high bar in terms of service exports and tourism.”