Will Recession in Italy and Problems in Germany Spread to Croatia?

By 3 February 2019

Italy has sunk into a recession, which has been confirmed by the latest statistics on the economic trends of Croatia’s largest export partner. In the last three months of 2018, the economy sank 0.2 percent, while the quarter earlier it dropped 0.1 percent over the same period of 2017. Although it might seem to be a mild recession, the Italian government expects the deepening of the crisis later this year. The recession in Italy will negatively affect Croatian exports and is undoubtedly a source of risk for Croatian economy that should not be ignored, reports Večernji List on February 3, 2019.

Italian economists say that the decline of the GDP was a consequence of a fall in agriculture, forestry, fisheries and industry, but that so far there is no indication of a reduction in consumption by citizens, which is crucial for Croatia. The latest figures from Italy in December even gave a hint that the economy might accelerate, but the decline in production and orders was too significant for the recession in Italy to be avoided.

From January to October 2018, Croatian entrepreneurs exported to Italy 12.9 billion kuna worth of goods, increasing the value of exports to the country by 10 percent. At the same time, Croatia imported 19.5 billion kuna worth of products, which was also an increase of 10 percent compared to the previous year.

The recession in Italy has not yet spilled over to Croatia, but if the Italian government's expectations come true, the orders could fall this year.

Another issue is that the German Ministry of Economy has revised its growth forecasts for 2019, from 1.8 percent to just 1 percent. That is the lowest growth rate of Germany in the last six years, but also a very conservative forecast inspired by the fear of the consequences of Brexit. For the time being, everything is stable in Germany, so the country has again recorded exceptionally low unemployment. What is essential for Croatia is that the Germans expect growth of imports as well as of the consumption of citizens, so it is possible that the slowdown in Germany could pass without significant consequences for Croatia.

Croatia’s exports to Germany grew by about 13 percent last year, but the trade balance is still unfavorable since Croatia exports just 12 billion kuna while at the same time importing 22.5 billion kuna worth of goods and services from Germany.

The trends in Germany and Italy should be a warning sign for Croatia, especially concerning public finance planning. Since the slowdown of growth is noticeable at a global level as well, this is the time for savings and cuts, and not for brisk spending, given that external and internal risks threaten to derail Croatia’s 2.8 percent growth plans for this year.

Translated from Večernji List (reported by Marina Šunjerga).

More news on Croatia’s economy can be found in the Business section.