Although the rise in living costs ‘slows down’ consumption, a recovery in personal consumption is expected

March data for the industry and retail trade for February shows mixed economic trends at the end of the first quarter of this year. The slowing decline in industrial production to -0.7 percent year-on-year (-1.7 percent in February) reflects a recovery in production of non-durable goods for general consumption, a smaller decline in intermediate goods, while the production of export-oriented capital goods continues solid growth (+5.8 percent), according to the weekly analysis of the Croatian Employers’ Association.

Inventories of finished products at manufacturers jumped 7.4 percent year-on-year (+4.0 percent in February), which, combined with the slowing decline in labor productivity in the industry (-0.9 percent year-on-year), indicates stabilization in supply chains and a certain optimism regarding foreign demand.

On the other hand, retail trade in March recorded a real decline of -1.3 percent year-on-year after a growth of 0.4 percent in February due to weaker sales of food, beverages, and tobacco products (-3.2 percent). Thanks to real wage and employment growth and a further decline in inflation, the slight decline in consumption in March is of a temporary nature.

Considering the slight acceleration in the decline of industrial production in the first quarter compared to the fourth quarter of last year (-1.7 percent year-on-year compared to -1.5 percent) and stagnation in retail trade after an increase of 0.4 percent in the last quarter of last year, these two key variables ultimately indicate a slowdown in the annual GDP growth rate in the first quarter of this year to around 2 percent.

HUP’s chief economist Hrvoje Stojić emphasizes in the analysis that this year they expect a decline in industry of -0.5 percent due to weaker foreign demand and reduced profitability of production due to the rising costs of key inputs. Although the strong rise in living costs undoubtedly ‘slows down’ consumption, HUP expects a recovery in personal consumption driven by tourism, a strong labor market with real wage growth, and increasing social transfers.

Given the strengthening prospects for the tourist season, the labor market, and the strengthening of state support measures for the population, the recent improvement in the government’s GDP growth forecast for this year to 2.2 percent is not surprising. Thanks to the strengthening of tourism prospects, a series of favorable circumstances for the euro area this winter, and a robust domestic labor market along with continued subsidies to mitigate the energy crisis, HUP has also recently raised its GDP growth forecast to 1.0 percent, with risks currently tilted upwards due to tourism.

Of course, one must not overlook the negative risks that may arise from the deepening energy crisis, geopolitical instability, recession in the euro area, persistently high inflation, excessive tightening by central banks, volatility in financial markets, and worsening financing conditions.