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Croatia Watch: GDP déjà vu
In Q2 24, Croatia continued to record solid growth rates that are among the highest in the EU. Although the pace of annual and quarterly growth has slowed down slightly, economic activity continues to be strongly supported by domestic demand. On the other hand, net foreign demand acted in the opposite direction yet again.
Real GDP up by 3.3% yoy in Q2 2024
In line with our expectation, the Q2 2024 economic activity slowed down slightly again, but the real growth rates remain solid. Moreover, they are still among the highest among the EU member states.
Namely, according to the seasonally adjusted data, economic activity in real terms increased by 0.8% compared to Q1 thus putting the real annual growth rate of GDP at 3%. The original data (i.e. non-seasonally and non-calendar adjusted data) reported an increase of 3.3% yoy in real terms.
The largest component of GDP, household consumption, slightly accelerated to 6.1% yoy (from the already solid 6.0% yoy in Q1 2024). This was not a surprise considering the already published strong data in retail trade as well as data for other services. Obviously, the robust labour market (i.e. increase of wages), decreasing unemployment and increase of employment, together with disinflation, have been supportive for personal consumption. On top of that, solid results from the tourism pre-season and its impact on consumer optimism, that remained above the long term average, should not be neglected. Eventually, we also saw strong momentum in household lending, especially in non-purpose loans.
The flash estimate also confirmed that investments have been in the flywheel for some time. Indeed, double-digit real growth (12.9% yoy) even points to a certain acceleration. We assume that the strong growth in gross fixed capital formation for the sixth consecutive quarter is mainly due to growth in the construction industry, which was presumably also supported by the available EU funds. Finally, government spending accelerated to 4.0% yoy (up from 1.0% in the first quarter of this year), likely due to growth in material rights within the public sector.
On the other hand, the contribution of net foreign demand continues to be negative, as exports of goods and services recorded a real annual decline for the fifth consecutive quarter (-1.3%) while imports increased (+5.2%).
In the second quarter, exports of services fell again (-5.2%) despite the very good results of the tourism pre-season, while imports of services rose (+4.5%). Also, imports of goods were stronger (+5.3% yoy) than exports (+3.1% yoy) thus making net negative contribution of foreign demand. This is not surprising when one considers economic trends in the euro area i.e. Croatia’s most important trading partners.
Economic activity still strongly supported by domestic demand
The first estimate according to the original data shows that gross value added (GVA) in Q2 2024 is 3.2% higher in real terms than in the same quarter of 2023. The quarterly GVA growth is visible in most groups of activities, but the highest positive contribution certainly came from the activities of wholesale and retail trade, transport and storage, accommodation and food service activities as well as construction.
On an annual basis, construction recorded the highest real growth rate (15.5%), followed by information and telecommunications (9.4%), wholesale and retail trade, transport and storage, accommodation, food preparation and, lastly, services (7.3%). On the other hand, industry continued to record negative growth rates, as its GVA fell by 5.5% yoy.
In short, the solid real GDP growth in H1 2024 (3.6% yoy according to original data or 3.4% yoy SA) is driven by the strong performance of domestic demand. On the other hand, net foreign demand continued to be negative while industry remains in recession.
Outlook unchanged
For the rest of the year, we expect the solid growth rates to continue, albeit with somewhat more moderate dynamics. We, therefore, stick to our forecast and outlook for the Croatian economic growth of 3.2% in 2024. Investment is enjoying solid momentum, probably due to withdrawal of the European funds, while the strong labour market and wage growth have been reflected in personal consumption for some time. It should be noted that government spending is largely under pressure due to the agreed increase in material rights in the public sector (partly under the influence of inflationary pressures from previous periods). Finally, the euro area has embarked on a path of modest recovery, led by the services sector. However, sustained growth will also require support from the industry sector as many core euro area countries rely on it. Results of the first half of the year support our expectations that a net negative contribution from foreign demand will be recorded in 2024.
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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.
In this quarterly asset allocation update, we provide the typical Croatian EUR investor with an in-depth market analysis, explanations of the individual asset classes, and the optimal portfolios under various risk tolerance levels. |
At the beginning of 2024, Croatia continued to record solid growth rates, among the highest in the EU. Although the dynamics of annual and quarterly growth has slowed down slightly, economic activity is still strongly supported by domestic demand. On the other hand, net foreign demand acted in the opposite direction, primarily as a result of decline in exports of services. |
In line with our expectations, the high-frequency data point to a mixed trend in economic activity in Q1 2024. A strong labour market, the continued increase in consumer optimism coupled with weakening inflationary pressures and the acceleration in consumer loan growth had a positive impact on retail sales. On the other hand, industrial production is still not showing any signs of recovery at the beginning of 2024. |
In this quarterly asset allocation update, we provide the typical Croatian EUR investor with an in-depth market analysis, explanations of the individual asset classes, and the optimal portfolios under various risk tolerance levels. |
Economic activity in Croatia continues to grow at solid rates that are among the highest in the EU. Private consumption will remain the growth driver in 2024, while rising government spending, due to the political cycle, increases the risk of fiscal deterioration in the medium term. Inflation has declined, although it is still at a high level and, a gradual monetary easing has become increasingly likely. Under these conditions, the equity market should perform well, albeit with limited upside potential after the stellar performance of CROBEX index during 2023 and at the beginning of 2024. |