Croatia: good forecasts but lower production

S&P's headquarters, NYC, USA (B64, CC BY)

Standard & Poor's (S&P) kept Croatian BBB's rating in the end of September 2018, and changed the prospects from stable to positive, thanks to expectations that the Croatian economy will continue to grow.

“Positive prospects reflect our expectation that the Croatian economy will continue to grow and public debt will be reduced, with risks associated with the largest Croatian food company Agrokor gradually shrink after the deal with most creditors,” said S&P in its statement. S&P estimates that Croatia’s GDP will grow by 2.8 per cent this year, and it will continue growing the next year, due to strong domestic consumption and good export performance driven by a strong tourist season. In March, S&P raised Croatia’s rating one degree, with stable prospects, due to a further reduction in public debt and an improved fiscal position of the country, as a result of continued economic recovery. Of the three leading world rating agencies, S&P and Fitch hold the Croatian rating one degree below the investment level and Moody’s two degrees below. At the same time, S&P and Fitch hold prospects positive, and Moody’s keeps it stable.

The Croatian Central Bank (Hrvatska narodna banka, HNB) expects a growth of Croatian economy somewhat below 3 per cent of GDP, but it also warns that there are risks. One of them, which could ultimately result in a smaller growth, is the possibility of trade shortages if the American-Chinese trade war intensifies. Then, there is a slowdown in industrial production in Italy and Germany, which is very important for Croatia, as these countries are the main foreign trade partners. I

On the other hand, the biggest contribution to the growth of Croatian GDP is expected from exports, growth of consumption and investments. The HNB’s forecasts the continuation of an employment growth in the next year, although there is a shortage of workers, and according to HNB’s survey the post-regulation has become the biggest problem for businessmen. There are significant structural problems in the economy, such as the weak growth in overall productivity. The central bank warns that demographic trends — the aging and emigration of the population — could lead to a reduction in the contribution of the labor factor to GDP growth and overall productivity. As noted, reducing the working-age population in some way should be compensated. There is, of course, the problem of additional pressure on the pension and health system, so it is extremely important to “smartly plan the continuation” of pension reform.

When it comes to new technologies, they have many advantages, such as increasing productivity, accelerating resource allocation, and improving quality of life, primarily through technological advancement in the healthcare system. On the other hand, they reduce the demand for certain occupations, and precisely because of the growth of productivity lead to a decline in the share of labor. The development of technology will bring significant changes on the labor market, and each country needs to prepare and offer other solutions. HNB also notes that the state must think about adjusting tax policies, then regulating, distributing income, pensions, and so on.

The most worrisome sign is that in the first eight months, compared to the same period last year, industrial production stagnated. According to the various financial expectations, the growth rate of industrial production in 2018 will be slightly lower than in 2017, suggesting a slowdown for the second year in a row. For stronger growth rates, it is necessary to strengthen the competitiveness of the entire economy, so that domestic and foreign demand growth can largely be met from domestic sources.

According to the main industrial groupings (GIGs) the annual output of the capital products declined by 13.5 per cent in August 2018. That is at the same time the highest rate of decline in the last five months. The production of durable consumer goods fall of 9.6 per cent and the production of non-durable consumer goods fall 2 per cent. On the other hand, the production of intermediate products grew by 5.1 per cent y/y, and energy production by 3.2 per cent. According to the National Classification of Economic Activities (NCEA), the manufacturing industry, with a share of about 80 per cent in total production, continues to grow at the negative annual growth rates for the second consecutive month, recording a fall of 1.7 per cent. Significant contribution to the decline came from textiles production (21.9 per cent decrease), leather and related products (16 per cent decrease) and other means of transport (mainly ships), with a fall of 48.7 per cent. Mining decreased by 15.7 per cent in August, while in electricity, gas, steam and air conditioning, growth was 8.2 per cent.

The Croatian Employers’ Association (HUP) stresses that the GDP is growing inadequately, and the tourist season, though good, calls for a stronger reflection on managing the tourism development. HUP expressed disappointment with current tax reform, because they expected stronger tax breaks, primarily because of the opening up of wage growth. The association believes that better and more efficient work could lead to positive changes, i.e. reforms, and argues that employment growth and further development of the company limits the government and its policies to its constraints.

The government warns that the 5 per cent of GDP growth, that many dream about, would require HRK55bn (EUR7,5bn) of investment potential. Such amount is currently unavailable, and it is a responsibility for all, not just the government, entrepreneurs, local governments and academic community to work together. The Minister of Economy, Darko Horvat said investments must grow dynamically. He is also convinced that this year, despite a relatively small growth of foreign investment, Croatia will reach EUR2bn in FDI. Mr. Horvat announced that by the end of the year a good quality analysis of administrative redistribution and non-tax benefits will be made. In this action plan the Ministry is preparing about 400 measures, a radical step in which it will try to abolish or drastically reduce some of the administrative barriers.

Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.

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