EC revises upward outlook of Croatia's GDP growth to 2.1 pct

The European Commission on Thursday revised upward its outlook of Croatia's growth in 2016 from a previous 1.4% to 2.1%, saying however that the pace of the recovery remained constrained by the still high stock of debt in both the private and public sectors.

The European Commission on Thursday released its Winter Economic Forecast for this and next year in which it said that at 1.3% (q-o-q), Croatia's GDP growth in the third quarter was higher than expected.

"Growth likely decelerated in the fourth quarter, but all in all, Croatia’s economy is expected to have expanded by 1.8% in 2015.  Benefiting from the strong momentum gathered in the second half of 2015, the recovery is forecast to gain ground in 2016," the EC said in its report on Croatia.

The Commission projected domestic demand to remain the main driver of expansion. Improving labour market conditions are set to support household spending, while investment should gain speed in 2016 and 2017 as the absorption of EU funds improves. The contribution of government consumption to growth is projected to remain positive throughout the forecast horizon.

Overall, real GDP is expected to grow by 2.1% in 2016 and 2017. 

Unemployment is expected to have decreased to 16.2% in 2015, due to the continued shrinking of the labour force but also increasing employment. By 2017, the unemployment rate is projected to contract further, on the back of sustained employment creation. However, as unemployment remains high, the average compensation of employees is expected to increase only moderately. Employment this years is expected to go up 1.3% in 2016 and 1.5% in 2017.

On the other hand, the unemployment rate is expected to contract 15.1% in 2016. Unemployment is projected to contract further in 2017 to 13.8% . However, as unemployment remains high, the average compensation of employees is expected to increase only moderately.

With the fall in energy prices expected to continue in the first half of 2016, price dynamics are set to be subdued. The expected turnaround in oil prices thereafter, coupled with resuming core inflation, is set to drive inflation back to 1.6% by the end of the forecast horizon.

The Commission projected the continuation of investment growth after investments grew last year by 1.7%. This year, their growth is projected at 2.6% and at 2.7% in 2017. Exports of commodities and services could go up 5% in 2016 and 5.3% in 2017. The Commission also expects an increase of imports -- 4.6% in 2016 and 5.3% in 2017.

Revenue windfalls due to higher-than-expected growth and some containment of expenditure growth are expected to have improved the general government deficit in 2015 to 4.2% of GDP, down from 5.6% of GDP in 2014.

Fiscal policy measures are expected to have had a broadly neutral impact on revenue as the additional revenue – in particular from higher health contributions and indirect taxes – was largely offset by higher deductions in personal income taxation. Growth in primary expenditures in 2015 is expected to have remained below nominal GDP growth, although the increase in investment expenditure and subsidies in the second half of the year suggest an easing of the consolidation effort, the European Commission said.

The 2015 deficit outturn remains highly uncertain. While further restructuring of corporations classified in the general government sector may have reduced their net borrowing, the potential accumulation of liabilities in the health care sector may have weighed on the budget balance.

The budget for 2016 has not been adopted before the cut-off date of the forecast. Under the no-policy-change assumption, the general government deficit is projected to decrease to 3.9% of GDP in 2016. The general government deficit is projected to decline further to 3.2% of GDP in 2017.

Growth in general government revenue is likely to be supported by the dynamics in private consumption and wages, and deficit-improving changes to the taxation of companies’ reinvested earnings. The yield from the corporate income tax in 2016 is likely to be affected also by the conversion of CHF loans (by reducing corporate profits in the banking sector), with an estimated impact of around 0.2% of GDP. 

The debt-to-GDP ratio is expected to have increased only moderately, from 85.1% in 2014 to 86.0% in 2015, reflecting stronger nominal GDP growth and drawing on government deposits. The debt ratio is expected to continue rising in 2016 and 2017, reaching 87.4% of GDP in 2017.

In 2015, the current account is expected to have registered a record surplus of 4.2% of GDP on the back of strong exports of goods and a generous tourism season. A temporary improvement was registered also in the balance of primary income as a result of losses accrued by foreign owned banks following the new legislation on the conversion of CHF mortgage loans.

After two years of robust expansion, exports of both goods and services are expected to moderate in 2016 and in 2017, on the back of more subdued competitiveness gains and a slow-down in global trade.

Growth in import volumes is also expected to slow down, broadly in line with the evolution of external demand.  These dynamics, combined with a further delayed recovery in energy prices, are set to bring about the stabilisation of the current account surplus to a comfortable 3% of GDP over the next two years, the European Commission said.

Risks to these growth projections are skewed to the downside, and are mainly related to the still high debt burden in both the public and private sectors and the limited capacity of the financial sector to support the recovery.

Last update: Thu, 04/02/2016 - 13:03
Author: 

More from Business

BAT factory in Kanfanar exports to 19 markets

British American Tobacco (BAT) is satisfied with the results achieved in its first year of doing business in Croatia...

Reports: AC Milan sale to Chinese group postponed to March

AC Milan's controlling company Fininvest and Sino-Europe Sports have agreed on moving the sale of the Serie A club...

British regulator fines Pfizer 84 million pounds for overcharging

A British government regulator fined global drugs giant Pfizer a record 84.2 million pounds (106.4 million dollars)...

Ikea's yearly profits jump by almost one-fifth to 4.2 billion euros

Swedish furniture retailer Ikea's full-year net profit rose 19.6 per cent to 4.2 billion euros (4.5 billion dollars...

EU Commission fines trio of banks 485 million euros for rate fixing

Credit Agricole, HSBC and JPMorgan Chase must pay 485 million euros (520 million dollars) in fines for manipulating...