HUB: Growth of the Croatian economy by 9.5 percent in 2021, then by 4.6 percent in the following year

The Croatian economy will grow by 9.5 percent in 2021, and by 4.6 percent in 2022, according to the forecast of the chief economists of the four largest Croatian banks as part of the latest 'HUB Outlook' published on Friday.

In the analysis titled 'More than a V-recovery: already above 2019, and further at a high rate', it was highlighted that this is yet another upward revision of the expectations for this year's GDP growth rate, considering that in the July Outlooks, when the 'V-shape' recovery was announced, the average expected growth rate was 5.3 percent. 

Thus, the average expected growth rate for 2021 is 9.5 percent with a very small range, determined by the most pessimistic expectation of one economist at 9.2 percent and the most optimistic at 9.7 percent, according to the HUB Outlooks.

– This is not surprising given the events and data that have been published since July. Croatia has firmly positioned itself among the countries of Central and Eastern Europe that are mostly surpassing the level of economic activity before the pandemic – it was emphasized.

As good news, they also pointed out that the optimism of the chief economists of Croatian banks does not wane regarding 2022. The average expected growth rate is thus 4.6 percent, with very small differences in forecasts – from 'pessimistic' 4.4 percent to optimistic 4.8 percent.

Increased inflation will 'eat up' a good part of wage growth

Economists expect that such rapid economic growth will spill over into the labor market through a decrease in the unemployment rate and wage growth. They expect wages to grow by 3.7 percent, which is faster than the projected inflation growth of 2.9 percent in the following year.

However, the difference between the two rates is smaller compared to previous years.

– In other words, increased inflation will 'eat up' a good part of the expected growth of nominal wages – they note from HUB. 

When it comes to economic growth, the two most important drivers will be exports and investments. Thus, after a spectacular growth of exports this year, a continuation of growth at a high rate of 12 percent is expected in 2022, while investment growth should accelerate from 9.2 percent in 2021 to 11 percent in 2022, they wrote from HUB.

Incentive for investments from NPOO

Considering that the corporate sector is still quite passive in investment terms, the main incentive for investments in the short term should come from the domain of state investments, which depends on the speed of activating funds from the National Recovery and Resilience Plan (NPOO). 

However, economists do not agree on when the strongest effect of these European funds can be expected, and this difference in responses can be interpreted as a logical consequence of the uncertainty regarding the government's, or rather the administration's, ability to launch a large number of projects. 

– There is room for skepticism in this regard, however, for development, it does not make a big difference whether we will see stronger effects next year or wait until 2023 when the introduction of the euro is also expected. In any case, it is a strong incentive for growth that, according to economists' expectations, will continue at high rates in the coming years – they emphasized from HUB.

Croatia will catch the train of ECB's monetary expansion

Furthermore, it is stated in the HUB Outlooks that the general government balance as a percentage of GDP is declining approximately in line with government projections, at 4.5 percent in 2021 and 2.9 percent in 2022, and it is expected that gross public debt will fall from 87.3 percent, which it was at the end of 2020, to 82.9 percent at the end of this year and to 79.7 percent at the end of next year. 

– Although the fiscal criteria from Maastricht are currently not in force due to the pandemic, the shown trajectory of the main fiscal ratios will reassure the finance ministers of the Eurogroup who will decide in mid-2022 whether Croatia can join the euro area – they emphasized from HUB.

In the context of Croatia's likely entry into the eurozone on the first day of 2023, chief economists expect that the European Central Bank's (ECB) quantitative easing policy will continue long enough for Croatia to 'catch that train', in terms of the impact of the euro area monetary policy on the demand for Croatian government bonds.    

In this regard, three respondents expect the end of the ECB's quantitative easing policy by the end of 2023, while one opens the possibility of an extension until 2024, with the majority expecting a gradual tightening of the purchase program according to a model of decreasing purchase quotas.

– Despite the tightening, Croatia will catch the train of the ECB's monetary expansion. Although, judging by the expectations of chief economists, it is about the last carriages – it was emphasized.

By the way, the president of the HUB club of chief economists of Croatian banks is the chief economist of Erste Bank, Alen Kovač, and the club also includes Ivana Jović from Privredna banka Zagreb (PBZ), Zrinka Živković-Matijević from Raiffeisen Bank, and analyst from Zagrebačka banka (Zaba) Hrvoje Dolenec. The latest survey among them was conducted during December this year, and the results were processed by Arhivanalitika.