The trade war that escalated this week with the introduction of ‘reciprocal’ tariffs for more than 180 countries trading with the U.S. is likely to result in a downturn of the American economy into crisis. As is often the case, when the largest economy in the world faces problems, the rest of the world is not in the best economic condition either. Accordingly, existing economic forecasts will need to undergo a serious revision.
The Croatian National Bank (HNB) highlighted in its spring macroeconomic projections that GDP growth could average around three percent in 2025 and 2026. The main support, according to central bank economists, is expected to come from domestic demand, albeit with a smaller contribution than in 2024. The HNB responded that it will comprehensively include the potential effects of tariffs imposed by the U.S. administration in its upcoming macroeconomic projection, which will be published in June as part of the publication Macroeconomic Trends and Forecasts.
Change of a series of parameters
– The projections will also be aligned with the projections and assumptions of other euro area countries, as they are prepared within the framework of the European System of Central Banks and the ECB (the so-called Broad Macroeconomic Projection Exercise – BMPE). They will take into account possible countermeasures from other countries, as well as the broader context of economic changes, including movements in raw material and energy prices, financing conditions, exchange rate fluctuations, and other relevant factors – stated the central bank.
According to them, although significant direct effects of tariffs on the Croatian economy are not expected – exports to the U.S. account for only four percent of total goods exports, with a large portion relating to pharmaceutical products that are currently exempt – potential indirect effects could be more pronounced. – These could primarily manifest through a reduction in demand from major Croatian foreign trade partners, such as Germany, which could have broader consequences for the domestic economy – the HNB stated.
Erste Bank expected economic growth of ‘around three percent’ for this year, primarily supported by personal consumption and investments. At a presentation at the end of last year, economists from the bank emphasized that personal consumption is supported by the state of the labor market, in the form of record-low unemployment levels, employment growth, and further wage increases. Investments, on the other hand, will continue to be predominantly based on a strong influx of European funds. The newly emerged situation with ‘tariffs from the Rose Garden’ has not significantly shaken Erste’s analysts.
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– Erste Group currently maintains its growth forecasts for the Croatian GDP for this and the next year, but we emphasize the increasing downside risks given the current economic events. The direct impact on the domestic economy is relatively limited due to the low amount of direct trade connection with the U.S. On the other hand, the indirect impact certainly exists, through the involvement of Croatian companies in global production chains – said Mate Jelić, macroeconomic analyst at Erste Bank.
Raiffeisen Bank also emphasizes that Croatia’s direct exposure to the U.S. economy is relatively small (the share of exports to the U.S. is less than one percent of GDP), but the potentially negative indirect impact on the Croatian economy through major foreign trade partners from the European Union should certainly not be overlooked.
– We have previously emphasized that our current estimates are exposed to risks primarily arising from the external environment to which Croatia, as a small and open economy, is exposed. However, for now, we remain with the current estimates of economic growth, and any changes will primarily depend on the estimated negative impact on the main EU economies. Consequently, we will consider the transfer effect on the Croatian economy. Due to the short time frame, as well as the extremely high unpredictability not only of the U.S. administration but also of the responses from foreign trade partners, we believe it is necessary to wait some time for a reliable assessment of potential impacts – say RBA analysts.
Return to 120 years ago
American economists point out that President Donald Trump’s announcement in the Rose Garden of the White House regarding the increase in tariffs means that the effective tariff rate on imports to the U.S. will rise to a level of 20 to 25 percent, the highest since the beginning of the last century. In that case, the likelihood of the U.S. economy falling into recession rises to 40 percent, and global economic growth will decrease from the current three to two percent.
Mate Jelić states that if we look at the structure of U.S. imports, certain sectors such as the automotive sector and pharmaceutical products appear to be somewhat more exposed, given their relatively higher representation within U.S. imports. – What further complicates the situation is the extremely pronounced uncertainty that can certainly contribute to some investors temporarily halting planned investment processes. In this context, it is currently difficult to speculate on the extent to which global economic growth will slow down – says Jelić.
RBA analysts, when asked about the global aspect, briefly stated that they do not expect a recession for now.
