Šantić: Due to the absence of structural reforms, we have a very modest growth potential

The growth of the Croatian economy will be somewhat slower this year than last year, indicating a modest potential for growth due to the absence of structural reforms, assesses the chief economist of Splitska banka, Zdeslav Šantić, following the latest forecasts from the European Commission, and emphasizes that the economic model has not changed but is again relying on personal consumption.

The European Commission expects the growth of Croatia’s gross domestic product (GDP) this year to be 2.8 percent, the same estimate it made three months ago, with personal consumption expected to remain the main driver of growth, while the biggest risk continues to be the restructuring of Agrokor.

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In the interim winter forecasts published on Wednesday, the Commission also estimates that economic growth in 2017 will amount to 3.2 percent, the same as it expected in the autumn forecasts.

“It was evident from the forecasts of domestic analysts that this year growth would be somewhat slower than it was in 2017. This indicates that our potential economic growth is very modest, which is a result of the absence of structural reforms in the past period,” emphasizes Šantić.

New economic model

He notes that during the prolonged crisis period in Croatia, everyone mentioned the need to establish a new economic model.

“However, we again see that personal consumption is the main generator of overall economic activity. Despite the mention of quite dynamic export growth due to renewed recovery and strong domestic demand, the positive effect of exports on GDP has been neutralized. We do not see significant changes in expectations either. The fact is that Croatia will continue to lag in growth dynamics compared to comparable economies, primarily in relation to EU countries in the region,” says Šantić.

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Reflecting on the risk surrounding Agrokor, he stated that the situation is not fully clarified.

“The solution with ‘lex Agrokor’ has been postponed, there are numerous unknowns, and the outcome of this case will depend on a part of the retail capacity and will affect their suppliers and all related parties. Of course, this could then lead to significant restructuring measures if there is a negative outcome,” he emphasized.

The Commission also predicts that the economy in EU28 will grow by 2.3 percent this year and by 2 percent next year. Malta is expected to have the highest growth at 5.6 percent, followed by Romania at 4.5 percent, Ireland at 4.4 percent, and Slovenia and Poland at 4.2 percent each.

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“It is evident that Europe is in a positive cycle, at its peak. The strongest growth in a long time will be achieved,” says Šantić.

He also emphasizes that it is very important for Croatia, as it largely determines the future behavior of the European Central Bank, that projections indicate that inflationary pressures remain below the important threshold of 2 percent annually.

“Namely, this indicates that if there is a tightening of monetary policy, it will still be gradual, so we do not have to expect any significant impact on financial markets,” concludes Šantić.