HUB has published the opinions of chief economists from banks on the most important economic trends and expectations.
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EU framework: very positive
International banking groups within which Croatian banks operate, evaluate this year very positively. Despite some slowdown in the EU economy at the beginning of the year, expected GDP growth rates are slightly above 2%.
Inflation is higher than in previous years (expected around 1.8%), which also affects prices in Croatia. However, a significant crossing of the threshold that the European Central Bank considers as entering the zone of moderate inflation and its target after which it reacts by raising interest rates (2% per year) is still not expected.
After the last ECB meeting on June 14, clear announcements were made that the bond purchase program should continue, albeit at a reduced pace of 15 billion euros per month in the last quarter. The intentions to raise reference interest rates are not current for at least another year unless there are inflation surprises.
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For the EU as a whole, faster or equally fast growth in exports and imports is expected, so the current account of the balance of payments, unlike the American one, will be in surplus of about 3% of GDP. From this side, there is fundamental pressure for the euro to strengthen. However, PROSPECTS July / 2018 GDP growth in the EU is expected to be around 2% HUB Prospects July / 2018 2 monetary and financial movements indicate movements in the opposite direction as the American FED raises interest rates. Therefore, the exchange rate between the euro and the dollar now seems difficult to predict.
Overall, this is a favorable phase of the business cycle that is likely to continue for some time and thus favor the continuation of economic growth in Croatia.
The wind at the bow could come from raising interest rates or the costs of protectionist policies, but for now, these risks relate to a longer time frame. To bring you closer to the views of chief economists on expected headwinds, we conducted a survey on forecast risks. It is presented at the end of the document.
A good year 2018.
Chief economists expect an average growth rate of 2.7% this year, but as the data in the table shows, there is considerable dispersion of expectations: the biggest optimist expects real GDP growth of 3%, while the biggest pessimist expects 2.3%. When interpreting these numbers, it should always be kept in mind that Croatian growth is slower than growth in similar countries of New Europe.
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The type of Croatian growth is gradually transforming from export-driven growth to internally driven growth. Revived personal consumption (the average expected growth is 3.2%, between 2.8% and 3.3%) thanks to rising wages and citizen borrowing dominates gross investments.
Although the expected investment growth rate is higher (average expectation 5.4%, between 4.9% and 5.8%), the smaller share of investments in GDP (around 20%) compared to the share of personal consumption (around 60%) means that the contribution of investments to overall growth is still less than the contribution of personal consumption.
Investments also have an indirect effect through imports, as a significant part of the demand for investment goods spills over into increased imports of those goods. Therefore, faster growth in imports than exports makes the net contribution of the external sector to GDP growth negative. However, chief economists expect that the current account balance of payments will remain in surplus of about 2.4%.
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This is an indicator that overheating of the economy cannot yet be spoken of: (1) the unemployment rate is falling but is still high (expected around 10%), (2) the core inflation rate is expected to be around 1.3%, thus significantly below the threshold of 2%, (3) public debt is falling and is expected to be around 74.6%, (5) a continuation of the decline in external debt is expected. The Croatian economy continues to be in a phase of healthy economic growth that does not increase but reduces macroeconomic imbalances.
Can fiscal policy be counted among the risks
In the upward phases of the business cycle, politicians usually make mistakes by increasing expenditures or reducing budget revenues (so-called reliefs) in ways that prove unsustainable when the business cycle turns, and then must retreat by collecting relatively higher taxes and/or cutting expenditures in crisis conditions, which often deepens them.
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The question arises whether this is happening now in Croatia?
After Croatia recorded a general government budget surplus of 0.8% of GDP for the first time last year, it is unusual that economists expect a deficit of 0.2% of GDP this year. Due to growth, a continuation in the surplus phase would be expected. In technical terms, it seems that there is a deterioration in the structural fiscal balance.
It should be noted the relatively wide dispersion of expectations among chief economists – from -0.5% for the biggest pessimist to a surplus of 0.5% for the biggest optimist. And it should certainly be noted that the state has some one-off expenditures this year (activation of shipbuilding guarantees, Petrokemija) that should not (or should?) appear in the coming years.
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Therefore, it can be concluded that fiscal policy is not a risk for growth. Only through the effects of the announced tax reform will it be seen whether it will become one in the coming years or whether the combination of positive effects of tax relief and more careful management of the expenditure side will definitely remove the fiscal and public debt from the list of risks for long-term economic growth.
Thanks to a more responsible fiscal policy and unchanged monetary policy of the ECB and HNB, chief economists do not expect significant changes in exchange rates and interest rates. The yield on the 10-year government bond is expected to remain at current levels of 2.2-2.3%.
What are the risks for growth then
Thus, the reasons are clear why this time we did not include fiscal policy on the list of risks for growth, but we do not rule out the possibility that we will soon return it. Currently, there are six factors on the risk list. All are related to global risks, none is inherently Croatian: (1) protectionism, (2) rising energy prices and inflation, (3) rising interest rates, (4) political instability and crisis in the euro area, (5) global political instability, and (6) excessively high private sector debt and inflated asset prices. Chief economists of Croatian banks assessed that the greatest fear should be of protectionism (trade wars) and excessively high debts accompanied by inflated asset prices in international markets.
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Economists emphasize that they express personal views, not the views of bank management. Their opinions were expressed by Hrvoje Stojić (Addiko bank), Hrvoje Dolenec (Zagrebačka banka), Ivana Jović (Privredna banka Zagreb), Alen Kovač (Erstebank), Zdeslav Šantić (OTP banka), and Zrinka Živković-Matijević (Raiffeisenbank Austria Zagreb).
