HNB Increased Economic Growth Forecasts, Interest Payments to Banks Will Not Push It into the Red

Due to the revision of data from the Croatian Bureau of Statistics (DZS), the Croatian National Bank (HNB) expects lower economic growth for this year than suggested by the September forecasts, but it anticipates a higher GDP growth rate for 2024. Additionally, for the next year, the central bank expects a faster decline in inflation than previously anticipated. These are the key highlights from the December forecasts of the HNB presented today by Governor Boris Vujčić during the Annual Media Briefing.

Vujčić emphasized that this year, Croatian GDP should grow by 2.6 percent, which is 0.2 percent lower than the autumn projections. HNB economists expect economic activity to grow again in the last quarter of this year, resulting in a GDP growth of 0.8 percent on a quarterly basis and 3.5 percent annually. Positive economic trends will continue into the next year, with new projections indicating that we can expect economic growth of three percent in 2024, which is 0.4 percent higher than previously expected by the HNB. For 2025 and 2026, the HNB expects economic growth of 2.7 and 2.6 percent, respectively.

Faster Decline in Inflation

The largest contribution to growth next year will primarily come from personal consumption, as well as exports and imports, as was the case in 2022, the governor explained. If we look at the decomposition of GDP, personal consumption and exports have decreased this year, but government consumption has increased from 2.7 to four percent. – In the next year, exports will return to normal levels – said Vujčić. Regarding economic growth in the Eurozone, on which the Croatian economy is heavily reliant, it will amount to 0.8 percent next year, while in 2025 and 2026 it will reach 1.5 percent.

As for price growth, the head of the HNB pointed out that the December forecasts indicate a faster reduction in inflation as all components have started to decrease, primarily food and service prices. After reaching an annual rate of 8.4 percent in 2023, it should drop to four percent in 2024, which is 0.6 percent lower than the September expectations. In 2025, we should witness an inflation rate of 2.5 percent, while it should fall to an ‘ideal’ two percent the following year. Of course, in the Eurozone as a whole, the inflation rate will be significantly lower; 2.7 percent next year and 2.1 percent in 2025. Regarding the higher inflation in Croatia than in the Eurozone, Vujčić stated that this is primarily the result of rising service prices, which have increased faster here than in other member states, mainly due to tourism and the introduction of the euro.

– The elevated inflation differential compared to the Euro area is increasingly a result of energy price inflation, but the cumulative increase in inflation is greater in Central and Eastern European countries. This is due to the fact that in Eastern member states, energy and food have a higher weight in the consumer basket – explained Vujčić. Cumulatively, from June 2021 to October this year, prices in Croatia have increased by 22.9 percent, placing us at the bottom of the group of Central and Eastern European countries (except Slovenia, where the cumulative rate reached 19.6 percent). Prices have risen the most during this period in Hungary, by 36.3 percent.

Weaker Wage Growth

The HNB expects a decline in inflation despite further wage growth, albeit at a slower pace. The governor noted that the trend of labor importation that began in 2017 is expected to continue, and the unemployment rate, after this year’s 6.4 percent, will fall to six percent next year, and will be 5.5 percent in 2026. Regarding real gross wages, after increasing by 5.7 percent this year, growth is expected to slow to 3.6 percent in 2024, while in 2025 and 2026 it will grow by less than two percent.

Croatia’s foreign position, expressed by the balance of the current and capital accounts of the balance of payments, is improving for three reasons. – These are the decline in energy imports, greater utilization of European Union funds, which have reached maximum engagement, and the growth of tourism revenues – said Vujčić.

In reflecting on the decisions of the European Central Bank from the last meeting on December 14, Vujčić reminded that all three key interest rates – the deposit rate (DFR), the repo rate (MRO), and the marginal lending rate from the central bank (MLF) remained unchanged at four, 4.5, and 4.75 percent. Regarding the deposit rate at which banks ‘park’ excess liquidity with the central bank, Vujčić emphasized that it has replaced the previous repo rate as the main instrument of monetary policy.

The HNB will pay domestic banks nearly 500 million euros in interest this year based on the acceptance of excess liquidity. When asked how this will affect the financial result of the central bank itself, the governor stated that the operations of some central banks in the Eurozone will be affected, but the HNB is not among those with high costs. – Our financial result will not be negative – said Vujčić.

The Decline in Apartment Prices Is Not Yet Visible

According to him, the tightening of the ECB’s monetary policy continues to transmit to the rise in interest rates in domestic banks. All the increasingly unfavorable financing conditions and reduced demand have dampened corporate lending, but households continue to borrow heavily. In this context, Vujčić pointed out that there is the largest difference in interest rates on non-purpose (cash) loans between Croatia and the rest of the Eurozone. – Non-purpose loans are the cheapest here – claims the governor.

Although interest rates on housing loans in Croatia have also begun to rise, in commenting on the real estate market, Vujčić stated that the cycle in the market has significantly cooled, but a pronounced decline in prices is not yet visible.