This year, we expect an industrial recovery of about two percent (after -0.3 percent in 2023), due to a recovery in foreign demand and a slight improvement in financing conditions in the second half of the year, while renewed disruptions in supply chains and rising energy prices pose the main risks to the domestic manufacturing industry, according to HUP’s analysis Focus of the Week.
A relatively modest recovery should, of course, be viewed in the context of the weak recovery of our main trading partners and current forecasts indicating that the euro area economy is likely to stagnate this year, and the recovery of goods exports will not compensate for last year’s strong real decline (-10 percent).
This year, we also expect a stronger real growth in personal consumption (3.7 percent after 2.7 percent last year) on the wings of continuous real growth in gross wages at a level of about six percent, largely supported by an unprecedented increase in the wage mass from the state budget of as much as 32 percent (or about 1.5 billion euros), further pressures regarding the growth of the same, relatively high indexing of pensions for prices and wages last year, and an increase in benefits to citizens from the budget (+16.9 percent or 1.1 billion euros), emphasizes HUP’s chief economist Hrvoje Stojić.
As usual, a stronger tourist season is the main positive risk for consumption, given the positive announcements from leading tourism operators and the improvement in confidence in the services sector in the EU.
In 2024, HUP expects a similar GDP growth rate of 2.5 percent. On one hand, strong fiscal expansion and a robust labor market extend their momentum in terms of economic growth, but also fuel inflation to the detriment of purchasing power. At the same time, Croatia increasingly shares the economic fate of the euro area on the brink of recession – to the detriment of goods exports, and we are witnessing a delayed deterioration in financing conditions after the beneficial impact of entering the euro area – to the detriment of private investments.
In addition to more challenging financing conditions, higher energy prices along with a non-competitive tax treatment of middle and higher wages adversely affect the competitiveness of Croatian companies.
Considering that wholesale prices of gas and electricity over a two-year horizon are about twice as high compared to the pre-crisis period, the potential for a renewed strong rise in spot energy prices due to geopolitical risks, as well as the recession in the euro area in the first half of this year, HUP calls for a constructive discussion on reducing the price differences of energy for companies and households as part of the future design of the electricity market – in favor of the competitiveness of Croatian companies.
Further opening of the domestic electricity market would enable lower energy prices and a more reliable and accessible supply of electricity. The development of competition would encourage greater investments in innovations in the electricity market and multiply renewable energy projects.
