HUB expects continued GDP growth in 2024 along with growth in real wages and exports

The Croatian Banking Association has published the latest edition of the HUB Outlook 2/2023, in which the chief economists of the largest banks present their opinions on the most important economic trends.

The chief economists expect that the official data for 2023, when published in early 2024, will show a growth in real GDP at a rate of 2.3 percent. Their expectations range within a narrow interval between 2.1 percent and 2.4 percent. This is slightly lower than the expectations of other institutions. For example, the European Commission expects a growth rate of 2.6 percent for 2023, as does the Croatian National Bank.

The growth this year has been most influenced by real personal consumption (2.4 percent) and investments (at a rate of 3.8 percent), which is still lower than the expectations from July when the expected growth of investments was 5.1 percent. The main change compared to earlier expectations relates to a decline in real exports at a rate of 1.7 percent. This is a result of a slowdown in foreign demand for Croatian goods and services exports due to a shallow recession in some of the main trading partners (Germany). Nevertheless, a decline in real imports at a rate of 3.8 percent is expected, which means that the contribution of net exports to GDP will remain positive.

The central role of growth in the most important component of GDP, personal consumption, is justified by the growth of real personal incomes in 2023 despite a high average inflation rate of 8.1 percent. A double-digit wage growth rate (13.1 percent), along with a decrease in the unemployment rate to 6.4 percent, has ensured a rapid recovery of real personal consumption, a low fiscal deficit (-0.5 percent), and a decrease in the public debt ratio to an expected 62.3 percent by the end of 2023.

Moderate acceleration in 2024 with lower inflation

Forecasts for 2024 are completely uniform at a growth rate of 2.5 percent. This is identical to the recently published forecast by the European Commission and lower than the Croatian National Bank’s 3 percent. However, among the chief economists and compared to earlier forecasts, there are significant differences regarding the structure of contributions from individual components of GDP.

First, a faster growth in real personal consumption is forecasted (3.1 percent in 2024 compared to 2.4 percent in 2023). The reason is the slowdown in inflation. Measured as an annual average, it is expected to fall to 3.6 percent, along with a continued growth in average wages at a rate of 8.6 percent. However, the chief economists on average predict a slower growth in investments (2.2 percent in 2024 compared to 3.8 percent in 2023). There are the greatest differences among individual forecasts regarding the investment component. The most optimistic predicts an investment growth rate of 4.2 percent, while the most pessimistic predicts a decline at a rate of 3 percent.

The optimistic forecast is based on a scenario of recovery in private investments with minimal impact from the slower drawdown of EU funds in 2024 due to the expiration of inflows of European funds from the multiannual financial framework 2014-2020. The pessimistic forecast predicts a cliff effect associated with reduced inflows of EU funds, along with continued stagnation of investments in the private sector.

Forecasts are more uniform regarding the growth of real exports and imports of goods and services. The chief economists expect a gradual recovery of economies in Central Europe led by a mild recovery in Germany, so exports could grow at a rate of 3.4 percent (with expectations ranging between 2.4 and 5.5 percent), while imports, influenced by the growth of domestic demand, could grow at a slightly higher rate of 3.9 percent (with expectations ranging between 3.0 and 6.0 percent).

With such trends, the unemployment rate could fall to 6.2 percent.

In line with the government plan, everyone expects a deepening of the deficit to around 2 percent of GDP, which will keep the external debt ratio above the 60 percent threshold (the average expectation at the end of 2024 is at 60.3 percent, with a range of expectations from 59.0 to 61.4 percent).

Inflation (average year-on-year) will continue to contribute to the reduction of the public debt ratio. Although the expected rate is 3.6 percent, with a narrow range of forecasts between 3.3 and 3.8 percent, it is significantly lower than the inflation for 2023. The chief economists believe that strong domestic demand will keep inflation in Croatia at a slightly higher level than the euro area average.

Decline in interest rates

HUB Outlook shows the consensus forecast of the chief economists of leading Croatian banks. The chief economists expect stability in bond yields in the coming period at around 3.5 percent (10-year). Nevertheless, they predict that a cycle of interest rate cuts by the European Central Bank will begin during 2024. However, the survey reveals differences in their expectations regarding the timing of the initial cut.

They are divided evenly: two expect the first cut in the European Central Bank’s interest rates in the second quarter of 2024, while two expect the start only in the second half of the year, towards its end. Two also provide a concrete forecast of the intensity of the cuts. One believes that during 2024, a reduction of 0.5 percentage points in the euro area and 0.75 percentage points in the US will follow, while the other increases the expected reduction to 0.75 for the euro area and 1-1.25 for the US.