Miodrag Šajatović: Question from 2020: ‘When will it get better?’ Answer: ‘It was in 2017.’

The announcement by the State Bureau of Statistics that GDP grew by 2.8 percent in the second quarter of 2017 evokes an old joke. One asks: ‘When will it get better?’ The other replies: ‘It was.’

Preoccupied with concerns about the consequences of clearing Agrokor’s debts and disturbed by the political instability that is currently threatening a third parliamentary election in three years, a typical Croatian entrepreneur and manager is likely unaware of the possibility that 2017 is the peak of the cyclical upswing that began in Croatia three years ago. And that a new phase of slowdown and recession may follow in a year or two.

Again, facades are being painted.

It is hard to accept that a growth of three percent in 2017 could be the peak. One would expect the peak to be when GDP grows by five percent in a single year. As it stands, we have not climbed a mountain, just a hill. And we should consider this as the best that the national economy can achieve under uniquely favorable conditions of low interest rates in the international financial market, an extremely good tourist season, high demand in developed EU countries as a consequence of the expansive monetary policy of the European Central Bank, and a more mature phase of drawing funds from EU funds.

If we are to judge by projections from the Banski dvori, 2017 is indeed the peak of the current phase of upswing that began with the exit from recession in 2015. Because, from 2018 to 2020, a slowdown is expected (2.8 percent in 2018, 2.6 percent in 2019, and 2.6 percent in 2020). According to some cyclical logic, that would be six years of upswing. It is hard to imagine that a new upswing would be possible after that without entering at least a short-term recession. Well, miracles do happen, so such a scenario should not be ruled out.

Assuming that Croatia is now close to the peak of the recovery and upswing phase, an interesting comparison can be made with the time ten years ago, when we were also riding the wave of a cyclical growth phase (and then in 2008, we crashed into recession). On the surface, there are similarities. This can be seen in the details. One of the signs of optimism in the upswing phase is the scaffolding on family homes. Facades are being renovated. This investment is not necessary (a good roof is important, the facade can wait), but it is important to people. One can again notice many fresh facades like in 2006 or 2007. Furthermore, people today in cafes and bakeries notice signs ‘We are looking for workers’. Many interpret this as a labor shortage due to the emigration of a large number of young people, but the newspaper archive reveals that handwritten job advertisements were common in the upswing phase ten years ago.

Reconciled with fate.

Looking at other signs, there are both similarities and differences. In both 2007 and 2017, the government entered into state investments. Exports grew then and now. There was a shortage of new apartments in Zagreb then and now. Personal consumption grew then and now. The difference is that before the last recession, the stock market was booming. The Crobex index grew by as much as 44 percent in three months in 2006. Today, the capital market is in a state of nirvana. Investors have neither forgotten nor forgiven the painful lesson. The difference is also that external debt dramatically increased ten years ago. Now it is stable. As external financial fuel, it has been replaced by funds from EU funds.

One could argue that we have become satisfied with little. We are grateful that there is no recession. That the record obligation of about 17 billion kuna of external debt is being reprogrammed in silence. That Agrokor’s financial collapse did not trigger a sudden chain reaction. Few are those who seek or offer solutions on how to raise the growth rate to the pre-election promised five percent. Collectively, we no longer believe in such a possibility.

We hope that Germany will continue to have stable growth and that our neglected exporters will maintain export growth rates on their own. And if international conditions worsen, and we have not used good years to create the foundations for healthier growth, we will bow our heads and endure another recession. After all, are there not those who have survived six lean years in business? If they did once, they will again.

Norwegians, in times of extremely high oil prices, set aside a special fund. For lean years. What oil is for them, tourism is for us. However, a fund from tourism’s extraordinary profits has not been established. We missed the opportunity to significantly increase the pie and reduce deficits in the healthcare and pension systems. Company balances are vulnerable. Political instability is high. All in all, another phase of upswing has been missed for establishing healthier foundations. We learn slowly.