Love me, love me not; there will be a recession, there won’t be… The game continues with an unknown outcome as it depends least on us. We have somehow accepted the war as a fact that no longer panics the actions within the leadership of the European Union, and the gas storage is being filled quite solidly from various sources. Moreover, the winter so far has been mild, so nervous tics and even more nervous forecasts have been absent.
The Croatian National Bank (HNB) constantly updates projections.
However, all of this is on shaky ground, which is why the projections are fragile and subject to almost daily changes. Even the HNB does not have finalized forecasts for 2023; it constantly updates them, and the final projection for this year for next year should be ready by mid-month (unfortunately, this text had to go to print before that). However, the HNB is sending the message that the direction of the main variables should not change too much compared to the previous projection.
– It is expected that any potential technical recession could be short-lived and relatively shallow, with a gradual recovery towards the middle of next year. Therefore, growth can still be expected for the entire year of 2023, but significantly lower than this year. Additionally, record amounts of EU funds are expected to be drawn next year, which will positively affect public investments. Inflation could peak in the last quarter of this year, after which a gradual decrease is expected. Some of the risks that had the potential for even less favorable scenarios have not materialized. So far, there is no shortage of energy supplies, and given the full gas storage and relatively warm winter, this is unlikely to materialize in the coming months. Nevertheless, risks still dominate that growth will be lower and inflation higher than expected. The main sources of uncertainty are geopolitical tensions and energy prices – they specify at the HNB, adding that several factors could mitigate the intensity of disruptions if any of the risks materialize and Croatia sinks into recession.
In such a scenario, the intensity of disruptions would be mitigated by the effect of aligning the monetary instruments when introducing the euro, or by releasing significant amounts of mandatory reserves and requirements for maintaining foreign liquidity.
The Prime Minister’s special advisor Zvonimir Savić states that, in addition to entering the eurozone, we still have a few aces up our sleeve. Namely, high GDP growth (5.2 percent) continued in the third quarter. According to Eurostat data, this is the second highest GDP growth rate among EU countries.
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— – For the entire year of 2022, the European Commission expects a growth of six percent, with only three EU countries growing faster than Croatia: Ireland, Portugal, and Slovenia. The latest macroeconomic indicators and business sentiment indicators point to a pronounced slowdown in economic activity in the second half of the year. Such a forecast reflects the expected weakening of the growth dynamics of the global economy, especially of important foreign trade partners like Germany, due to high inflation eroding real incomes, deteriorating economic sentiment, and worsening financial conditions. Persistently high inflation and geopolitical tensions negatively affect economic prospects and further pressure public finances. Therefore, the government expects GDP growth next year of 0.7 percent, which is close to the European Commission’s expectations of one percent. However, even such a low growth rate would be among the four highest in the EU – says Savić.
The Government Ignores Warnings
HGK’s chief economist Goran Šaravanja is on the same track, believing that the government’s growth forecast of 0.7 percent and the OECD’s 0.8 percent are more realistic than the IMF’s October forecast of 3.5 percent.
– This is also indicated by the data that orders for German industrial products are slowing down, signaling slower growth in commodity exports not only for Croatia but for all of Eastern Europe. On the other hand, tourism is expected to achieve solid results next year as well. When it comes to inflation, I certainly expect a lower rate, around six percent. Given the global economic situation, it could be even lower than this expectation, as supply difficulties have been the main generators of inflationary pressures in Europe over the past few years, and this year it is a lack of demand. The slowdown in economic activity will also affect wages. The movement of real wages will show how successfully entrepreneurs cope with the slowdown – estimates Šaravanja, adding that the government should not do anything that would further complicate the already uncertain global economic framework for domestic companies. —
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– Additional tax burdens should be approached very cautiously so that companies that do not owe their additional profits to the consequences of the crisis are not unfairly affected, and so that a broadly conceived tax on extraordinary profits does not jeopardize companies’ motivation to invest in Croatia – he concludes.
Šaravanja is certainly not the first to warn of this, but the government is currently ignoring such warnings.
Pessimistic and/or Realistic
Hrvoje Stojić, recently the chief economist of HUP, remains the most pessimistic (or realistic) analyst: next year he expects a slight decline in GDP of about minus one percent, in line with the development of the recession in the euro area and the negative impact on foreign demand along with continuously rising energy import costs. —
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– After almost a complete recovery from the pandemic’s consequences, further growth in tourism is limited by reduced investments in capacities compared to pre-pandemic years and more restrained demand for travel. Elevated inflation also negatively affects consumer sentiment and personal consumption, while sustained tourist activities, a solid level of employment, and wage growth in the private sector act as buffers. Investment prospects are mixed, with rising interest rates, fears of stagflation, a cooling housing boom, declining profitability, and tax uncertainty negatively affecting private investments, while record inflows from EU funds support public investments – estimates Stojić.
Zrinka Živković Matijević from RBA remains in the positive zone: she projects a growth rate of 1.8 percent, with significantly emphasized negative risks that, if realized, could push Croatia towards stagnation, along with a relatively high inflation rate of 6.7 percent.
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— – We expect to maintain a surplus on the current account of the balance of payments, while the deficit on the goods account during this year, as well as next, will significantly widen due to strong growth in import values due to higher prices. However, the negative balance on the goods account will not slip into a deficit on the current account of the balance of payments. This key indicator of macroeconomic imbalances will remain in surplus thanks to service exports, remittances from workers abroad, and increasingly generous inflows of money from European funds. This year, an additional inflow of these funds will already be noticeable as part of the National Recovery and Resilience Plan. Thus, funds from European sources are becoming an increasingly important factor in financing the deficit in trade – says Živković Matijević, adding that economic prospects assume an industrial/technical recession in the euro area and Central Europe at the turn of this year into next, with relatively less pronounced slowdowns in Southeast European countries, which are more service-oriented.
Two additional factors will be more pronounced and thus affect economic movements: the hit to consumer demand, as inflation does not relent, and the volatility of financial markets, along with an increase in risk aversion, which will pose additional challenges to the economy.
Inflation Remains a Topic
The chief economist of Erste Bank, Alen Kovač, whose growth estimates are also somewhat modest, dissects the components of GDP. He says that the contribution of personal consumption due to inflation, on the one hand, and normalization after COVID-19 restrictions, should be neutral. —
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– Investment activity should slow down under the influence of a more cautious private sector, which is facing recession risks and rising financing costs, while the public sector, or the component of investments from EU financing, will have a stabilizing character. The dynamics of exports will slow down due to the slowdown in economic growth of major trading partners, or the expected stagnation at the EU level. Service exports, predominantly tourism, after almost full normalization in 2022, will have a much more neutral role in shaping the growth rate, as some negative risks related to the energy crisis and geopolitical complications should also be mentioned. In conclusion, in 2023, the growth rate will range from 0.5 to one percent. We can actually talk about a stagnation scenario with still more pronounced negative risks. Inflation will remain a topic next year. In addition to the pronounced slowdown in economic activity, tightening monetary policy will positively affect the demand side of inflation. Therefore, next year, after an average price increase of over 10.5 percent in 2022, we expect a slowdown in average inflation from 6.5 to seven percent. When we talk about priorities for 2023, after important integration steps, eurozone, Schengen, we should focus on the most efficient use of the potential of EU funds, or their counter-cyclical capacity in conditions of slowing growth – says Kovač.
Risks Can Be Mitigated
How important, and perhaps decisive (if needed), EU money will be for the necessary state aid to the economy (Did we even need a new tax?), Savić emphasizes. Namely, EU assistance significantly affects budget revenues, primarily the Recovery and Resilience Mechanism. This is also shown by the pace of using European funds under the National Recovery and Resilience Plan.
– By mid-year, Croatia had received one and a half billion euros, and by the end of the year, the amount will rise to 2.2 billion euros, or 40 percent of the total available non-repayable funds from the National Recovery and Resilience Plan. Thus, Croatia has become the third fastest country in the EU in fulfilling reforms and investments, and then in drawing European money – says Savić, adding that we can quite easily mitigate risks.
Croatia enters 2023 as a new member of the euro area, with an all-time high credit rating, low interest rates, close to the euro area average, an almost record level of employment, the highest employment rate ever, and the lowest unemployment rate ever, along with a record high average salary.
It seems that, besides tourism, our joker card, this time the EU money is keeping us afloat. Whether this is a blessing or a curse in the long run, as it does not push us towards reforms again, seemingly remains an unanswered question. Only seemingly. The migration for a better life is quite a loud answer.
