Macroeconomists: In the last quarter of 2017, GDP growth slowed, possibly below 3 percent

Due to the slowdown in personal consumption and exports, as well as stagnation in industrial production, most macroeconomists estimate that the growth of the Croatian economy in the fourth quarter of last year was less than 3 percent year-on-year.

The State Bureau of Statistics (DZS) will publish next week the first estimate of gross domestic product (GDP) for the last quarter of last year, and eight macroeconomists who participated in the Hina survey estimate on average that the economy grew by 2.7 percent compared to the same period a year earlier.

>>> CEIZ index indicates a slowdown in the growth rate

Their growth estimates range widely from 2.1 to 3.2 percent. This will be the 14th consecutive quarter of GDP growth, but slower than in the previous quarter, when the economy grew by 3.3 percent year-on-year.

Slowed consumption growth

Macroeconomists in the Hina survey state that the growth of the economy is still primarily supported by the strengthening of personal consumption, the largest component of GDP. The strengthening of personal consumption is indicated by the growth in retail trade turnover year-on-year for 40 consecutive months, which has not been recorded since the DZS began tracking these data.

However, in the last quarter of last year, “real retail trade growth slowed to 3.4 percent year-on-year compared to 5.5 percent in the previous quarter, despite double-digit growth in foreign tourist overnight stays during the same period, which indicates a slowdown in private consumption growth during that period,” notes one of the macroeconomists in the Hina survey.

>>> EIZ expects GDP growth to accelerate in the third quarter to 2.9 percent

Although the impact of tourism weakened in the last quarter of last year, consumption continues to grow thanks to tax changes that led to wage increases. According to DZS data, the average net salary of employees in legal entities was 5,973 kuna in December, which is nominally 2.3 percent or 135 kuna higher year-on-year. On the other hand, the slowdown in retail growth in the last months of last year was significantly influenced by the postponement of car purchases to 2018 due to the announced reduction in excise duties, the survey states.

Continued export growth

The growth of exports also positively impacted the economy last year, primarily due to the growth of the European Union economy, Croatia’s largest foreign trade partner. However, in the last quarter of last year, the growth of goods exports somewhat slowed.

“Goods exports increased in the fourth quarter of last year by 7.4 percent year-on-year, while in the fourth quarter of 2016, the growth was 12.6 percent,” notes one of the macroeconomists.

>>> Winners and losers in the proposed budget for 2018

Goods exports supported GDP growth throughout last year, increasing by 12 percent compared to the previous year, to 103.9 billion kuna. However, DZS data also indicate a strong increase in imports, by 8.6 percent, to 161 billion kuna, resulting in a foreign trade goods exchange deficit that increased by 1.6 billion kuna or 3 percent year-on-year.

“Good trends in export movements continued, but the strong growth in imports throughout the year and in the fourth quarter led to a negative impact of foreign trade on GDP growth,” assesses one of the macroeconomists in the survey.

Industrial production stagnated

The slowdown in economic growth is also a result of the weakness in industrial production, which fell in the last two months of last year. A decline in industry for two consecutive months has not been recorded since mid-2014. As a result, industrial production stagnated year-on-year in the last quarter of last year, while it grew by 2.9 percent in the previous quarter.

“The slowdown in retail and industrial production in the last quarter is due to several factors: a slowdown after a record tourist season, high bases from the previous year, and although in a milder form, the effects of the crisis in Agrokor are still felt through somewhat milder growth in production and investments,” notes one of the macroeconomists.

>>> Industrial production fell for the second consecutive month, by an unexpected 2.5 percent

While production stagnated, macroeconomists estimate that investment growth continued in the fourth quarter of last year, marking the 10th consecutive quarter, but slower than in the previous quarter when gross investments in fixed capital grew by 3.4 percent year-on-year.

Growth in 2017 below expectations

If the average estimate of macroeconomists for growth in the last quarter of last year of 2.7 percent is realized, it would mean that the economy grew by 2.9 percent for the entire year of 2017, slower than the 3.2 percent a year earlier. This would also be slower growth than expected. In a Hina survey three months ago, eight macroeconomists expected an average GDP growth of 3 percent.

The European Commission recently published an estimate that GDP growth in Croatia for 2017 should be 3.2 percent, while the Croatian National Bank (HNB) expects growth of 3.1 percent. The government, on the other hand, based the budget for last year on an estimated economic growth of 3.2 percent.

>>> Croatia’s credit rating could improve next year

Macroeconomists say that the crisis in Agrokor, the largest domestic conglomerate under pressure from debts to banks and suppliers of around 58 billion kuna, has not significantly affected GDP growth this year.

“All in all, despite Agrokor, which had an impact through some potential channels – primarily through investments and demand for suppliers – 2017 was a good year due to strong growth in foreign demand, which reflected in high growth in goods exports and tourist services,” notes one of the macroeconomists in the Hina survey.

In 2018, GDP growth slowdown

This year, however, a further slight slowdown in economic growth is expected.

According to the latest Hina survey, eight macroeconomists estimate on average that economic growth in 2018 could be 2.8 percent. Their growth estimates range from 2.3 to 3 percent. The HNB, on the other hand, expects economic growth of 2.9 percent this year, and the government bases the budget for this year on the same growth rate.

>>> Economy 2018: Wage growth, GDP growth, new tourist records, main threat Agrokor

In the winter forecasts, the European Commission estimated that Croatian GDP would grow by 2.8 percent this year. The International Monetary Fund (IMF) expects the same growth rate, while the World Bank estimates that the growth of Croatian GDP will be 2.6 percent.

“The slowdown in growth should be a result of the increased base effect after the growth achieved in the past three years, which should also lead to a slowdown in domestic demand growth and a slowdown in the real growth of the value of goods and services exports, especially due to the absence of measures that would have a greater impact on further growth in domestic demand, such as last year’s changes in income tax. Positive shifts are expected in investment movements, particularly through increased use of EU funds, while the biggest risk remains the resolution of the situation related to Agrokor,” concludes one of the macroeconomists in the Hina survey.

Prepared by: Slavica Cvitanić, Nenad Bach