MYTH ABOUT DOMESTIC GDP: Croatia Grew the Fastest in the Last Quarter, but in the Long Run, It Is at the Bottom of Transitional EU

Domestic statisticians once again launched an optimistic data last Tuesday. GDP in the third quarter grew by 2.8 percent compared to the same period last year. Considering that this is the most abundant quarter, which also includes the peak of the tourist season, it is additionally pleasing that the growth is higher than in the first two quarters (1.6 percent and 2.6 percent, respectively). The real growth rate with seasonally adjusted data is even higher – three percent. Prime Minister Andrej Plenković did not miss the opportunity to emphasize the comparison with the data published by Eurostat for 23 EU member states, according to which Croatia grew the fastest in the last quarter, with Cyprus (+2.2%) and Romania (+2.1%) as the closest followers.

– This was contributed by Croatian entrepreneurs and workers, as well as strong government interventions in the context of numerous crises aimed at preserving social cohesion. The measures we have taken have helped maintain citizens’ standards, continue real wage growth, employment, and maintain labor market stability. Additionally, strong momentum for the economy is provided by investment growth, influenced by the successful implementation of the National Recovery and Resilience Plan. Along with the realization of reforms and the use of European funds, we continue to encourage growth and strengthen the competitiveness of the economy – Plenković boasted.

Between Exports and Investments

However, informed economists have been repeating for years that Croatia needs growth greater than three percent and that it could easily achieve it if the state ‘tightened up’ – through more frugal behavior and taking less money from entrepreneurs and all citizens, as well as a more stimulating tax policy, better management of state-owned enterprises and the entire asset portfolio, and eradicating corruption without keeping fingers crossed in party pockets.

But even an annual growth of 2.8 percent (or three percent seasonally adjusted) at a time when the eurozone and the entire EU are stagnating is not bad, although after a successful tourist season, it could have been expected that the growth compared to the previous quarter could be higher than the achieved 0.3 percent. However, the structure of GDP reveals some alarming trends. Once again, the largest contribution to growth came from household consumption, encouraged by wage increases in the public and state sectors and government interventions. State revenues and consumption also increased. The best news in all of this is that gross investments in fixed capital grew at a rate of as much as 6.1 percent. For comparison, the highest growth in this category (18.1%) was recorded in the second quarter of 2021, when a series of investments – especially in the tourism sector – that were halted during the pandemic were activated. However, current investments should be seen in some other items in the future, primarily exports. And precisely the export of goods and services had the largest shortfall from July to September. The disappointing stagnation of services (-0.5%), which includes tourism, grew by 9.2 percent in the pre-season. Even more dramatic is the decline in goods exports of 20.4 percent, which followed the previous quarter (-9.3%).

Problems Came from Europe

It seems that these data are largely ‘ordained’, meaning they have reasons we cannot influence. They reflect the stagnation of the rest of the EU, especially our main partners, primarily Germany, Austria, and Italy. Domestic entrepreneurs have been warning for months about a significant drop in orders, especially in construction and complementary industries – metal and wood. The same story has spilled over into tourism. When things are not going well in their home countries, people spend less on vacations. After an encouraging pre-season in July, there was a 4.6 percent decrease in overnight stays by Germans compared to the previous year, with the decline in August rising to 5.2 percent, and in September to 5.8 percent.

It should be noted that Croatia has still grown on the wings of post-pandemic recovery (after a dramatic drop during the lockdown in 2020). But where do we stand regarding GDP when looking at a slightly longer period? Last year, compared to 2019, Croatian GDP grew by 21.9 percent, and when looking at the decade in the EU, growth since 2013 has been 52.7 percent. Or, according to Plenković’s method, during his terms at the head of three governments, from 2016 to 2022, GDP grew by a significant 43.3 percent. At first glance, this is not bad even when considering inflation during that period.

To the EU Average by Around 2060?

Such data certainly come in handy for promotional, political purposes, and we have no doubt they will be used in the election campaign. However, at HDZ’s pre-election rallies, comparisons with other countries will certainly not be shouted. Indeed, in all three cases, Croatia has grown faster than most of ‘old Europe’, and the EU average, or the eurozone. However, our main competitors are from ‘new Europe’, namely ten transitional countries of the ‘Three Seas’ – between the Adriatic, the Baltic, and the Black Sea. In this competition, things do not look so bright. In ten years, only Slovakia’s GDP grew less than Croatia’s.

During Plenković’s era, only Slovenia’s GDP grew slower, and compared to pre-pandemic times, less than Croatia’s GDP grew – alongside Slovakia and Slovenia – only Hungary’s. Bulgaria and Romania, for example, have doubled their GDP and grown almost twice as fast as Croatia. In Croatia’s first decade in the EU, the ranking of transitional and other countries by GDP has tightened. Croatia entered the EU with a per capita GDP at the level of 40 percent of the EU average, and today we are at around 50 percent. If Croatian growth continues at around 3.4 percent per year (which is the average from 2013 to 2022) and if the rest of the EU maintains the same growth trend, Croatia could catch up to the EU average around 2060.

However, this is just a consolation. After all, Croatia had the highest per capita growth in the last two years, only after statisticians accounted for the exodus of several hundred thousand people, who now send money from abroad (more than five billion euros last year, or 6.7 percent of GDP), but do not count in the population.