Croatia’s 2.8% GDP growth in Q2 beats expectations

Croatia’s 2.8% GDP growth in Q2 beats expectations
By Akin Nazli in Belgrade August 31, 2016

GDP growth in Croatia accelerated from 2.7% y/y in Q1 to 2.8% y/y in Q2, the first estimate from the statistics office showed on August 31.

Eight economists previously surveyed by news agency Hina estimated that Croatian economy had grown by 2.3% on average in the second quarter thanks to the consumption growth, industrial production growth, investments and the favourable tourism season. The survey also showed that the economists increased their GDP growth forecast for 2016 to 2.1% from a previous 1.4%.

Escalating growth performance in the first second quarter was again mainly supported by domestic private consumption. Households’ final consumption grew 3% y/y in Q2, slightly lower than the 3.1% growth recorded in Q1. Gross fixed capital formation growth also accelerated from 4.3% in Q1 to 6.3% in Q2 while export growth decelerated from 7.1% y/y in Q1 to 4.1% in Q2.

On the production side, all sectors posted growth in Q2 while manufacturing growth was the highest with 5.7%. Meanwhile, growth in wholesale and retail trade, transportation, storage, accommodation and food service activities sector decelerated from 4.8% in Q1 to 3.3% in Q2.

Caretaker Prime Minister Tihomir Oreskovic said on August 31 that he expected the budget deficit to be below 3% of GDP, adding that the debt and unemployment were falling and that exports were growing, About Croatia reported.

Initial indicators for Q3 are also promising. The European Commission’s Economic Sentiment Indicator (ESI) for Croatia increased by 1.3 points in August compared with July, reaching this year's highest level of 119.6 points, according to About Croatia.

The Croatian economy grew by 1.6% in 2015, emerging from a six-year recession. The Adriatic country has posted GDP growth in the last seven quarters since Q4 2014. However, political stability, required to implement long-demanded reforms, has not been achieved yet. The Adriatic country is currently headed to snap elections on September 11, which are not expected to bring any dramatic change to the current divided parliament structure.

The Croatian finance ministry expects the economy to expand by 2% this year. A Reuters poll of 11 analysts published on March 18 revealed a median GDP growth forecast of 1.5% for Croatia this year and 1.8% in 2017.

On August 26, Erste Bank increased its GDP growth forecast for 2016 to 2.2% from a previous 1.8% due to improved domestic demand. Erste Bank’s chief economist Alen Kovac expects private consumption growth to accelerate to 2.5% this year from 1.2% in 2015.

The central bank said on July 13 that it revised up its GDP growth forecast for 2016 to 2.3% from a previous 1.8%. The largest contribution to this year’s expected growth should come from foreign demand, but also from a rise of all elements of domestic demand. The growth of private consumption might be higher than last year, thanks to a faster growth of employment and gross salaries.

S&P said on July 15 that it hiked its GDP growth forecast for 2016 to 1.7% from a previous 1.2%.

Moody’s believes that Croatia’s potential growth is below 1%, which is low for a converging economy and below other catching-up economies, due to historically low investment and structural rigidities, a low labour force participation rate and bottlenecks in the absorption of EU funds. Moody’s expects 1.5% GDP growth this year and an average growth of 1.7% over the next four years.

The growth outlook, in the near and long term, remains a rating weakness, according to Fitch. Fitch forecasts that growth will reach 1.8% this year, and average 1.9% in 2017-2018. In the near term, growth will be driven by domestic demand, underpinned by lower energy prices, rising real wages, and another strong tourism season. Tourism will remain a key growth driver. Heightened security risk in many competitor markets is likely to boost tourism inflows this year. Fitch estimates Croatia’s potential growth at 1%-2% per year, a very low rate for a country at Croatia's income level. Croatia's low potential growth rate reflects a large and inefficient public sector, slow resolution of bad loans, weak progress on structural reform and a challenging demographic outlook.

Real GDP Growth by Expenditure Aproach
(y/y, %) Q4-14 2014 Q1-15 Q2-15 Q3-15 Q4-15 2015 Q1-16 Q2-16
Overall 0.2 -0.4 0.5 1.2 2.8 1.9 1.6 2.7 2.8
Final Consumption (FC) -0.5 -1.0 0.4 0.6 1.2 2.0 1.1 2.5 2.9
- Households' FC  -0.5 -0.7 0.3 0.6 1.4 2.4 1.2 3.1 3.0
- Non-profit organizations' FC -1.1 -0.3 1.8 1.5 2.0 2.1 1.9 2.1 1.8
-Government's FC -0.5 -1.9 0.6 0.4 0.6 0.8 0.6 0.6 2.6
Gross Fixed Capital Formation -4.1 -3.6 -0.4 0.8 2.2 3.7 1.6 4.3 6.3
Exports of goods and services 5.9 7.3 7.2 10.2 8.0 11.6 9.2 7.1 4.1
Imports of goods and services 0.3 4.3 5.7 6.9 8.1 13.6 8.6 6.1 6.7
source: dzs
Real GDP Growth by Production Aproach
(y/y, %) Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16
Agriculture, forestry and fishing -2.8 -3.0 -0.5 3.2 1.7 1.4
Manufacturing, mining&quarrying and other industries 0.3 2.0 4.3 3.6 6.3 4.9
- Manufacturing -0.6 2.9 6.4 5.7 8.9 5.7
Construction -1.3 -0.1 0.2 -1.4 3.1 4.3
Wholesale and retail trade, transportation, storage, accommodation and food service activities 2.6 4.4 5.2 2.7 4.8 3.3
Information and Communication -1.9 0.0 -0.1 0.3 1.0 1.9
Financial and Insurance Activities 0.6 0.9 -0.3 0.6 0.7 1.1
Real Estate Activities -1.0 -0.1 0.1 0.2 0.4 0.7
source: dzs