Croatian Economy: Top in Terms of GDP Decline, Next in Terms of Growth Rate

As Poslovni Dnevnik/Jadranka Dozan writes on the 6th of May, 2020, as far as the Croatian economy is concerned, the European Commission (EC) predicts a GDP decline of 9.1 percent in 2020, but with a relatively quick start to recovery and 7.5 percent growth next year.

With the economic forecasts that come with the rolling around of spring, the European Commission recently presented the first official assessment of the consequences of the coronavirus pandemic on the European economy, and this year it is described as a "recession of historical proportions".

New forecasts compared to the winter forecasts of less than three months ago have clearly shown the extent of the economic shock caused by the coronavirus outbreak; As early as February the 13th, 2020, the EC's winter forecast for this year predicted a slowdown in European GDP growth to 1.2 percent, and in the spring, it turned into an expectation of a decline of 7.4 percent and then a recovery at a rate of 6.1 percent next year. year, which rests on assumptions that are nevertheless accompanied by numerous concerning uncertainties.

In the case of the Croatian economy, the European Commission's forecast for 2020 from mid-February has shifted from a 2.6 percent GDP growth forecast to a worrying 9.1 percent decline, but with a relatively quick start to economic recovery that should be reflected in growth of 7.5 percent in 2021, with domestic demand as the main driver of that growth.

The European Commission also predicts a higher rate of decline than that of Croatia this year in only three other Mediterranean countries - Greece (9.8 percent), and hard-hit Italy and Spain (9.4 percent). At the same time, next year, their predictions see the Croatian economy at the top in terms of growth in forecasts; when it comes to countries that the EC predicts will have better forecasts than Croatia in 2021, only Greece (7.9 percent) outdoes it. Compared to last week's projections, it turns out that the EC is somewhat more optimistic.

The Croatian Ministry of Finance's predictions of a slightly deeper decline this year (9.4 percent) and more moderate growth next year (6.1 percent) may still be explained by the Croatian Government's fresher and fuller insight into the state of the Croatian economy than that of the more distanced EC. And although these forecasts assume a gradual normalisation of life and work, the EC highlights the uncertainty factor of the duration of that desired and expected normalisation, as well as the very real risk of a potential second wave of the coronavirus epidemic.

Currently, the common denominator of the forecast for the Croatian economy remains the expectation of a relatively quick start to the recovery process. Whether it will take Croatia two, three or more years to reach last year's GDP level remains to be seen, but this time it is not expected that it will take a full decade, which is what the unfortunate situation looked like for the country after the devastating 2008 economic crisis.

Thus, in a review of Croatia's situation, EC analysts point out that the Croatian economy saw in the ''entrance'' of the coronavirus pandemic in a much better condition than it did with the 2008 crisis. This is especially true for macroeconomic and budgetary indicators. However, Zeljko Lovrincevic from the Zagreb Institute of Economics points out that at the same time, Croatia's demographic picture is far worse than it was back then, and the technological matrix has not changed significantly, which still makes the economy much more vulnerable.

Regarding the structure of the Croatian economy, the European Commission has emphasised Croatia's enormous level of reliance on tourism, which affects the depth of the expected decline this year, but also poses a risk in the case of longer travel restrictions.

"Due to the expected increased aversion to international travel of potential foreign tourists, tourism is not expected to recover to the level of 2019 in 2021," the forecasts say.

However, domestic demand should recover faster than exports do, as uncertainties about the outlook for global trade remain significant, and this year's export outlook is exacerbated by the recession(s) being experienced by Croatia's main foreign trade partners.

When it comes to household consumption, the Croatian Government's measures to (co)finance wages in the business sector should help preserve it. At the same time, projects financed from EU funds, as well as measures to support the liquidity of companies, should have a mitigating effect on the dynamics of investments, the European Commission pointed out.

The negative impact of the large decline in exports of goods and services on GDP should, in turn, be mitigated by the high import component of tourism exports.

"Unlike the Croatian Government's projections, in which the unemployment rate is falling very slowly according to today's values, the European Commission's projection instills optimism," commented Luka Burilovic, head of the Croatian Chamber of Commerce (HGK).

The Commission believes that the Croatian Government's measures to support wages and liquidity should mitigate the decline in employment, but despite this, employment will still fall sharply this year in sectors that are likely to experience disruptions for the longest time, such as the leisure, tourism and hospitality industry.

The unemployment rate, after last year's fall to a historic low (6.6 percent), could rise by about three and a half percentage points this year, according to the EC, to 10.2 percent, but the Commission expects it to fall again to 7.4 next year. Finally, the Commission has somewhat more favourable forecasts regarding the deficit. After three years of surplus, this year they see the general government deficit at 7.1 percent of GDP, and next year they calculate that it could be reduced to 2.2 percent.

The EC estimates that partial and complete write-offs of taxes and social security contributions for the hardest hit companies in the second quarter should reduce revenues by the projected 1.5% of GDP. They also calculate that, for example, subsidies for salaries in the private sector could cover more than half a million employees and cost almost 2 percent of GDP.

The decline in activity for the Croatian economy and the government measures to try to keep things afloat has resulted in a significant increase in financing needs, so the EC expects public debt to rise to 89 percent of GDP this year, with a decline to below 84 percent of GDP in 2021.

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