RBA: Economic Growth Continues Thanks to the Increase in Personal Consumption and Investments

Analysts from Raiffeisenbank Austria (RBA) expect that the growth of the Croatian economy, driven by personal consumption and investments, will continue in the third quarter, and they state that their growth estimate for the entire year of 2.3 percent is “exposed to positive risks.” In an analysis titled “It’s Time for Reforms,” published on Friday, RBA analysts indicate that the first indicators for the third quarter confirm estimates that economic growth will continue during that quarter, thanks to the increase in personal consumption and investments.

– Personal consumption will continue to find support in the absence of inflationary pressures, somewhat favorable labor market trends, and strong growth in tourism indicators, the analysis emphasizes.

It is also added that investment activity, which accelerated in the second quarter, is gaining momentum in both the public and private sectors, and encouraging data on increased utilization of EU funds is noted. In conditions of good budget filling, despite political uncertainty, it is likely that investment growth has continued, the analysis states.

– In such conditions, the projected real growth of the economy for 2016 of 2.3 percent is exposed to positive risks, even in the case of a slowdown in growth in the last quarter, RBA analysts emphasize.

They also add that during the first six months, the reduction of the country’s external vulnerability continued, reflected in the decrease of gross foreign debt and a surplus in the current account of the balance of payments.

– However, the level of Croatia’s net foreign investment position at 78 percent of GDP – the acceptable threshold value is 35 percent of GDP – clearly indicates the further need to reduce macroeconomic imbalances, and one way to achieve this is to increase competitiveness and exports, RBA analysts emphasize.

They add that in the conditions of economic recovery, inflows into the state budget are increasing. With restrained government spending, the budget deficit has fallen below 3 percent of GDP, with expectations that it will remain at these levels in the coming years.

– Namely, the government’s focus is on further fiscal consolidation, along with tax relief and creating a stimulating business environment. Thus, assuming unchanged external conditions, growth projections until 2018 are exposed to positive risks, the analysis states.

However, they warn that the medium to long-term sustainability of growth is largely conditioned by the implementation of reforms in public systems (healthcare, education, social, pension system), stronger rule of law, and increased efficiency of government administration.

– Otherwise, changes in the external environment through, for example, increased financing costs, a slowdown in growth of the most important trading partners, or in an extreme case, a sudden and unforeseen decline in tourism would jeopardize Croatia’s recovery, as well as the sustainability of public finances, RBA analysts warn.