Hemmings (OECD): Pension reform should encourage Croats to retire later

– Global GDP growth is expected to remain weak but positive at 2.7 percent in 2024. In the USA, GDP growth will slow to 1.3 percent next year, while in the Eurozone, GDP will grow by 1.1 percent next year. Overall inflation has continued to slow in many countries, which is good news for households as many economies have proven to be more resilient, but inflation remains high – said Phil Hemmings, senior economist at the OECD, during the 15th Lider’s Conference Day of Big Plans which gathered a record number of participants today in the Crystal Hall of the Westin Hotel in Zagreb.

The OECD expects continued inflation reduction in 2023 and 2024, to a level of 2.6 percent. However, inflation is higher than expected, and core inflation in many countries has not significantly slowed, noted Hemmings. He also emphasized that, despite the slowdown in economic growth, labor markets remain strong, unemployment is low, and demand pressures are easing. Therefore, the OECD expects continued inflation reduction in 2023 and 2024. The outlook for businesses has improved – globally, production is weak, but services are still positive.

Regarding the Croatian economy, the situation is good, Hemmings assessed based on the recently published OECD Economic Review of Croatia, which is issued every two years. For 2023, the OECD predicts a growth of the Croatian economy of 3 percent, approximately the same as globally, and for 2024, a growth of 2.4 percent.

– The labor market is strong, unemployment is low, and inflation is declining. Fiscal incentives could help reduce inflation, and to converge revenues, strong growth needs to continue. The first priority in Croatia should be business investments and productivity. Also, while lower regulatory burdens would unlock the benefits of ongoing reforms – noted Hemmings, but warned that fiscal policy in 2023 and 2024 should avoid increasing the deficit.

He added that corruption control is weaker than in other OECD countries and that criminal prosecutions and sanctions need to be stricter. On the other hand, pension reform should encourage Croats to retire later. Croatia has the potential, Hemmings said, to attract qualified workers from foreign countries, and the return of emigrants would also increase the workforce. Additionally, Croatia has made progress in terms of environmental conditions.

Croatia more attractive to investors due to the euro

– Exports of goods are falling in most countries of Central and Eastern Europe, including Croatia. However, lower energy imports help the trade balance. Croatia is the largest importer of energy in SEE countries. However, regarding investment attractiveness, Croatia is better than other countries, which is related to the value of the currency. The Croatian euro is more valued than currencies in the region – explained Dan Bucșa, UniCredit’s chief economist for Central and Eastern Europe, during the conference in his macroeconomic forecast for Croatia and Central and Eastern European countries.

He also added that they do not expect industrial production to improve next year. Regarding tourism, Croatia had a good tourist year. Bed occupancy during the peak season in Croatia is one hundred percent, which is the highest in Europe; however, at the same time, bed occupancy outside the season is the lowest in Croatia, Bucșa warned.

– If Croatia wants to develop tourism, it should not focus on the peak season but on the off-season. Investment in tourism should focus on extending the season and capacity, i.e., hotels – Bucșa said, adding that prices in tourism in Croatia have risen more than anywhere in Europe, except in Serbia, especially compared to other European tourist destinations.

Given that next year is an election year in Europe, Bucșa says that we do not expect taxes to decrease very quickly. However, governments in all other countries in the CEE region tax businesses more, therefore, Bucșa emphasized,’if you have a competitor in those countries, they will pay much higher taxes.’ Also, Croatia pays much lower interest rates than other countries and will, Bucșa predicts, remain so for at least the next three years.

– Interest rates will decrease, but not at the same pace in all countries. This means that the era of cheap money has ended, and we will not see as much investment as before. Zombie companies will finally declare bankruptcy, there will be a wave of unemployment, but not like in 2008, although the pressure on wages will decrease, albeit not equally in all countries – Bucșa concluded, stating that Croatia stands better than the regional average and hopes it will remain so in 2024.