Croatian GDP growth accelerates despite political uncertainties

Croatian GDP growth accelerates despite political uncertainties
By Akin Nazli in Belgrade May 31, 2016

GDP growth in Croatia accelerated to 2.7% y/y in Q1 from 1.9% y/y in the last quarter of 2015, the first estimate from the statistics office showed on May 31.

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 six quarters since Q4 2014. However, political stability, required to implement long-demanded reforms, has not been achieved yet. Croatia’s ruling coalition, which came into power in January, is again on the edge of collapse over a non-confidence vote for the major coalition partner HDZ’s leader Tomislav Karamarko due to take place in June.

Escalating growth performance in the first quarter was mainly supported by domestic private consumption. Households’ final consumption grew 3.1% y/y in Q1, higher than the 2.4% growth recorded in Q4 2015. Gross fixed capital formation growth also accelerated to 4.3% in Q1 while the other components of the consumption side lost their growth pace, except non-profit organisations’ final consumption which grew 2.1% in both of the last two quarters. Export growth decelerated to 7.1% y/y in Q1 from 11.6% in the previous quarter.

On the production side, all sectors posted growth in Q1 while manufacturing growth hit 8.9%. Growth in wholesale and retail trade, transportation, storage, accommodation and food service activities sector also accelerated to 4.8% in Q1 from 2.7% in the last quarter of 2015.

Tim Ash from Nomura Securities said on May 31 in an e-mailed note that "the very good GDP growth figure affirmed the continuation of the recovery evident since last year, likely driven by strong net export performance as the benefits from EU membership finally build, and also very good performance from tourism, plus better absorption capacity from EU funds. Obviously Croatia is struggling at the moment given the fragility of the ruling coalition, but the macro backdrop is supportive, and might allow the credit to endure through all this," according to Ash.

Raiffeisen Research said in a May 30 report that although the near-term impact of the lingering political crisis in Croatia could be still seen as credit neutral (or even slightly positive as government spending remains below expectations), the medium-term impact is definitely credit negative. Raiffeisen also stressed that all rating agencies do have a negative outlook on the sovereign (with rating updates looming according to the pre-determined rating calendar in July by all three major rating agencies).

In a previous e-mailed comment on May 27, Ash said that there might be a fair bit of durability in the macro story, enabling the country to ride out a period of political uncertainty.

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.

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 European Bank for Reconstruction and Development (EBRD) said on May 11 in its Regional Economic Prospects May 2016 report that it increased its 2016 GDP growth forecast for Croatia to 1.5% from 0.5% in its November 2016 report, and also raised its 2017 GDP growth forecast again to 1.5% from 1%.

The EBRD thinks that geopolitical tensions remain a major source of risk for the global economy, while Croatia and Montenegro may benefit from tourists looking for alternative destinations during the summer season due to problems in destinations such as Egypt, Tunisia, Turkey and Greece.

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