HNB expects GDP growth in 2019 to accelerate to 3.0% from 2.6% in 2018, the central bank said in a press release. Recall that in July it predicted a 3.1% GDP growth this year, an upward revision from 2.5% projected in May and from 2.7% projected in December 2018. Thus, HNB’s 2019 GDP growth projection ranks among the most upbeat being lower only from that of the EC (3.1%) and we perceive it as overall overestimated.
The slight downward revision in our view reflects worsening external environment and increasing uncertainties stemming from developments abroad. It is also not surprising given that GDP growth in Q2 unexpectedly decelerated to 2.4% y/y from the higher-than-projected 3.9% y/y growth reported in Q1, while the development of high frequency indicators do not speak of much stronger growth in Q3 although the Economic Institute of Zagreb projects an acceleration to 3.2% y/y growth in the third quarter. The central bank said in the press release that along with slightly slower pace of economic activity, it also expected a change in the growth structure, namely stronger contribution on part of domestic demand at expense of smaller contribution of foreign demand. It said that in Q3 GDP growth stepped up, with industrial production going up 0.2% and real retail trade dipping 0.2% from Q2. Employment growth slowed down and the number of the jobless stayed the same as in Q2, while wages continued to grow at the same pace as in Q2. It noted that the slowdown of the economic activity of some of the important trading partners of the country could also adversely affect the future economic developments, in which circumstances, the monetary policy will remain expansionary while maintaining the stability of the nominal exchange rate of the HRK against the EUR.
HNB also said that the annual inflation rate could fluctuate around 1.0% in the coming months, with the average annual inflation rate estimate for 2019 being 0.9%, higher by 0.2pps as compared to the July forecast.
Making an analysis of the last months, the HNB said that the high HRK liquidity of domestic credit institutions continued to increase in September, supporting the favorable trends in financing domestic sectors. Lending went up 3.7% y/y, with corporate lending decreasing by 1.9% y/y and household lending increasing by 7% y/y. The general government’s debt at the end of June was above the level recorded at the end of 2018 due to the servicing of foreign securities due in the second part of the year. Exposure to systematic risks in the first half of the year remained moderately high and the financial system is stable, the HNB said. In the financial sector, favorable trends continued owing to higher quality assets, higher solvency and reduced dependence on foreign financing. Favorable financing terms facilitate the servicing of household and corporate debts, but the extended period of low interest rates could result in underestimation of risks and higher vulnerability, the HNB concluded.