The European Commission raised its estimate for the growth of the Croatian economy (GDP) this year to 2.1 percent, up from the previous 1.4 percent, but emphasized that the pace of recovery will be limited due to high debts in both the private and public sectors.
The European Commission published its winter economic forecasts for this and next year on Thursday, stating that the growth rate of Croatia’s gross domestic product (GDP) in the third quarter of last year was 1.3 percent on a quarterly basis, exceeding expectations.
– Economic growth is likely to slow in the fourth quarter, but overall, the economy is expected to have grown by 1.8 percent in 2015. Thanks to the strong momentum that occurred in the second half of 2015, it is estimated that recovery will solidify in 2016, the EC states in its report on Croatia.
The Commission estimates that domestic demand will remain the main driver of growth, with improvements in labor market conditions supporting household consumption. Investments are expected to accelerate in 2016 and 2017 as the absorption of EU funds improves, and a continued positive contribution from government consumption to growth is also anticipated.
– Overall, a real GDP growth rate of 2.1 percent is expected in 2016 and 2017, the EC states.
Unemployment is expected to decline
The EC expects the unemployment rate in 2015 to be 16.2 percent, due to the continued decrease in the working-age population, but also an increase in employment. This year, employment is expected to rise by 1.3 percent, and by 1.5 percent in 2017. On the other hand, the unemployment rate is expected to fall to 15.1 percent this year, and to 13.8 percent next year. However, the Commission warns that unemployment remains high, which is why average wages are expected to rise only moderately.
The decline in energy prices will continue in the first half of 2016, so price dynamics may remain subdued. After two years of deflation,
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This year, the Commission also expects continued growth in investments, after they rose by 1.7 percent last year. Total investments are expected to grow by 2.6 percent this year, and by 2.7 percent next year. Exports of goods and services could rise by 5 percent this year, and by 5.3 percent next year. Import growth is also expected – by 4.6 percent this year, and by 5.3 percent next year.
Public finances in better shape, but deficit is high
The increase in budget revenues due to higher-than-expected economic growth and some constraints on cost growth improved the general government deficit in 2015, which the Commission now projects at 4.2 percent of GDP, down from 5.6 percent in 2014. The EC believes that fiscal policy measures had a largely neutral impact on budget revenues, as additional revenues – particularly from higher health contributions and indirect taxes – were mostly offset by a reduction in the tax burden on wages.
The growth of primary budget expenditures in 2015 is expected to remain below the nominal GDP growth rate, although the increase in investment costs and subsidies in the second half of last year suggests a weakening of consolidation efforts, notes the EC. The budget deficit for 2015 remains uncertain. While further restructuring of companies in the general government sector may have reduced their net borrowing, potential accumulation of liabilities in the health sector could pressure the budget balance.
The budget for 2016 has not yet been adopted, the EC states, and under unchanged assumptions, the general government deficit is estimated at 3.9 percent of GDP in 2016, down from 4.2 percent last year. In 2017, a deficit of 3.2 percent of GDP is expected. These deficit estimates are lower than the autumn forecasts, when the Commission expected the deficit to be 5.6 percent in 2015, 4.7 percent this year, and 4.1 percent of GDP in 2017.
The growth of general government revenues is likely to be supported by the dynamics of personal consumption and wages, as well as changes related to the taxation of reinvested profits of companies, the EC believes. Corporate income tax revenues, however, are likely to be influenced by the conversion of CHF loans in 2016, with an estimated effect of approximately 0.2 percent of GDP.
The EC also estimates that indebtedness increased moderately in 2015, from 85.1 percent of GDP in 2014 to 86 percent in 2015, as a result of stronger GDP growth. The EC estimates that the share of public debt in GDP will continue to rise over the next two years. Thus, it could reach 87 percent this year, and 87.4 percent of GDP next year. These estimates for the growth of public debt are lower than the autumn forecasts, when the Commission expected that by the end of 2017, public debt would reach 92.9 percent of GDP.
Balance of payments remains positive
According to the Commission’s estimates, the balance of payments in 2015 was in surplus by a record 4.2 percent of GDP, supported by strong goods exports and a good tourist season. A temporary improvement was also recorded in the primary income position, as a result of losses for banks in foreign ownership due to the conversion of CHF loans.
After two years of strong expansion, exports of goods and services in 2016 and 2017 could be moderate, due to a slowdown in global trade and subdued competitive advantages, the EC estimates. It also expects a slowdown in import growth, mainly related to export demand. This dynamic, combined with the further delayed recovery of energy prices, should stabilize the surplus in the balance of payments at an acceptable 3 percent of GDP over the next two years, the EC believes. Risks to lowering these estimates are mainly related to the still high debt burden in both the public and private sectors and the limited capacity of the financial sector to support recovery, warns the EC.
In terms of GDP growth, Croatia is in the middle of the EU rankings
According to the Commission’s estimates, GDP growth of 1.9 percent is expected across the EU this year, and 1.7 percent in the eurozone member states. Ireland is expected to record the highest GDP growth this year at 4.5 percent, followed by Romania with a growth of 4.2 percent. Malta and Luxembourg are expected to record growth of 3.9 and 3.8 percent, respectively, while growth above 3 percent is also expected in Poland, Slovakia, Latvia, and Sweden. With a growth of 2.1 percent, Croatia stands alongside the Netherlands, Hungary, and the United Kingdom. The Commission estimates that only Greece will record an economic decline this year, by 0.7 percent, while all other countries will record growth. The largest eurozone economies – France, Italy, and Germany – are expected to grow between 1.3 and 1.8 percent.
(Source: HINA)
