Petar Vušković: Another lockdown would lead us into economic depression

In line with expectations, the Croatian economy has soared on the wings of the general European 'opening' and the beginning of the tourist season, recording a jump of as much as 16.1 percent year-on-year, the largest growth since 1996, and the first positive movement in GDP after four quarters, announced the Croatian Bureau of Statistics. This is, of course, a comparison with the same period last year, which everyone would prefer to forget as soon as possible, but this does not diminish the impressive jump in activity. For comparison, the highest growth rate of a comparably smaller 7.2 percent was recorded by Croatia in the second quarter of 1997. As explained by the CBS, the explosive growth is a result of a low base and a huge drop in GDP in the second quarter of last year of 14.4 percent, but also of all components of GDP, especially personal consumption (households spent 14 percent more in the last quarter than in the same quarter last year). Thus, just a few lines of basic statistics have vividly illustrated the cost of fighting the pandemic.

Economic analyst Petar Vušković, president of the Center for Public Policy and Economic Analysis, states that Croatia has officially exited the recession. 'Such a historically high growth rate was expected given the base effect of the same quarter last year and extremely low economic activity due to the lockdown of the economy. The reason for economic growth lies in the increased volume of personal consumption and the growth of exports of goods and services (goods exports increased by 35.2 percent, and services by 56.3 percent, ed.). Additional economic growth is expected in the third quarter of 2021 due to a good tourist season', he states, adding that the data confirms the 'V' shape of the recession that lasted for a year and three months. In other words, the initial hopes of many analysts and institutions that economies affected by measures could record a rapid growth after a sharp decline have indeed materialized. At the beginning of the year, such expectations seemed increasingly unlikely, mainly due to significant problems in vaccine distribution, but summer was a turning point in which this year was economically 'saved'. It should be noted that this was largely influenced by a change in the approach to fighting the pandemic in many countries during the spring and early summer, as well as the population’s fatigue from anti-pandemic measures.

Despite the good results, Vušković warns that growth is not the same as development. 'Looking at economic development per capita, Croatia is only at 65 percent of the European Union average. For economic development, we need a wise and rational macroeconomic policy that will address structural reforms; privatization and public administration reform.  We are mistaken if we think that through the National Recovery and Resilience Plan (NPOO) we can achieve healthier economic growth. The NPOO is not and cannot be an economic program, but it can be an alibi for not implementing structural reforms. The productivity of the entire economy is key, not selective European policy', he is resolute.

According to him, the domestic economy needs 'a much more complete and consistent package of measures', which would include large privatizations, public administration reform, a reduction in state spending (currently at 45 percent of GDP) and the number of employees in the public sector (one in three workers works for the state). 'In such conditions, the state cannot deliver „value for money“ nor encourage competitiveness', Vušković believes. In his analysis, he also touched on the burning issue of inflation. 'Inflation reduces the value of our incomes but also our savings. It is more destructive than taxes. Currently, it is below three percent and such inflationary pressure is considered permissible. If the inflation rate exceeds the set limit, the Croatian National Bank will have to reduce it through monetary instruments, the reserve requirement rate, and operations in the open market'. It is precisely in rising inflation that Vušković sees the best reason to avoid another lockdown of the economy, as in that case, the economy could end up in stagflation, that is, a state of simultaneous rising unemployment and inflation. 'With existing financial imbalances, rising public debt (91 percent of GDP) and the increase in the general government deficit (3.8 percent of GDP), Croatia would not withstand another lockdown lasting more than three months. We would quickly enter a new recession that would bring us to the lowest point of economic activity – economic depression', he concludes.