Croatia Watch: Risks are turning to the upside
The Q1 GDP results brought both annual and quarterly growth. With the economic environment proving to be more resilient, the avoided recession in EA and investments that are yet to see a stronger flywheel from EU money, risks to our forecasts are turning to the upside.
Positive contribution of net foreign demand, but industry suffering
Today's GDP release brought somewhat positive surprises. Namely, the first Q122 GDP results showed an acceleration of economic activity on a quarterly basis. According to the seasonally adjusted data in comparison to Q422, GDP grew by 1.4% thus putting the annual real change at 2.6% yoy (+2.8% according to original NSA data).
Growth continued to be broad-based in Q1 as well, with real growth in all components of GDP, except for the import of goods and services where the annual decline of 0.8% was recorded. On the other hand, the export of goods and services continued to grow with a 9.1% yoy increase in services, encouraging our expectations of another successful tourist season. Consequently, the contribution of net foreign demand was positive. The continued growth of GFCF (gross fixed capital formation) capital for the fifth quarter in a row is undoubtedly the result of the more successful use of EU money. Strong pressure on wage growth, a still resilient labour market, and positive trends in tourism contributed to a slight acceleration of household consumption increase (+1.4% yoy compared to 1,3% in Q422). Finally, government spending slowed to 2.2% yoy.
Looking into more details on the supply side and gross value added, the only component that clearly reflects the uncertainty is the industry. Namely, in the respective quarter, only manufacturing reported negative developments and dropped by 2.8% yoy in real terms. On the other hand, the first estimate shows that GVA increased in real terms by 3.1% yoy driven by a significant increase in service activities.
What about the future?
For the whole 2023, our projection and expected GDP growth are exposed to positive risks. The economic environment has proven to be more resilient, the euro area has avoided recession (for now), and investments are still expecting a stronger flywheel due to the withdrawal of European funds. Moreover, we remain very optimistic about this year's tourism results. In addition, the strong labour market and wage growth reduce the negative effects of still relatively strong inflation.
The already published physical indicators in tourism for April, as well as the announcement of retail trade figures, support moderately optimistic expectations. Namely, April’s reading showed a real retail trade growth of 4.2% compared to April 2022. This is also the highest real annual rate in the last ten months. However, the decline of the industry and its negative contribution to GVA and the environment of high uncertainty call for caution. Moreover, according to the latest data, the volume of industrial production in April recorded a decline both on a monthly (-2.4%) and annual (-3.5%) level.
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Zrinka ZIVKOVIC-MATIJEVIC
Croatia Zrinka is the Head of the Economics and Financial Research in Croatia. She has been part of research team since 2004 and in 2009 became the Head of Croatian Research team. She holds a Master of Science degree in Banking and Public finance. She is particularly interested in a public finance and structural issues that are influencing long-term and sustainable growth. Zrinka is author or co-author of several professional publications. In 2019 she was voted as Chairman of Chief Economist Club with Croatian Banking Association on two year mandate. In free time she likes to discover new countries and cultures.
Out of a difficult macro-financial decade (the 2010s) Croatia emerged stronger, as proven in recent crises. Croatia stayed the minimum time inside ERM II and adopted the EUR 1 Jan 2023. Euroization has been traditionally high, and HRK abandonment is easy to bear. Pros of the common currency, including cheaper (re-)financing costs (public & private sector), outweigh cons. Now the door to European capital markets opens up. We expect local banks and non-financials to make greater use of Eurobond markets. Slovakia can serve as a blueprint here. On top, "country risk" appetite re-emerges, also regarding Croatian exposures at Western banks. The latter is crucial as a lot of investments will be needed for real convergence. Finally, we see no evidence that the euro introduction excessively fueled inflation. |
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