Desperately seeking light at end of Croatia’s recessionary tunnel

By bne IntelliNews April 9, 2014

Guy Norton in Zagreb -

In recent years the IMF’s economic predictions for Croatia have generally proved to be far more optimistic - and ultimately far less accurate - than many of the local economic analysts, whose relative pessimism has proved to be much closer to the mark. So the latest blow to the government's immediate economic hopes came April when the International Monetary Fund (IMF) slashed its growth forecast for Croatia. 

In its spring economic outlook report, the Washington-based supranational predicted that Croatia will this year remain mired in what it has termed “an unusually drawn out recession”, with GDP set to shrink by 0.6%. That’s in stark contrast to the IMF’s autumn 2013 economic outlook report, when it forecast that the country might indeed register positive GDP growth of 1.5%, thus ending a six-year long period of economic contraction. 

The IMF’s sharp downward revision of its growth forecast for the Balkan state further undermines the credibility of the current centre-left coalition government’s own prediction that foresees GDP expanding by 0.2% this year, after contracting by a cumulative total of 12% since 2009.

The consensus among Croatian economists has long been that this year there will be no meaningful improvement on 2013, when output shrunk by 1%.

The potential light at the end of the tunnel lies in the fact that the IMF still believes the country could actually exit from recession in 2015 and post positive economic growth of 0.4%.

Mixed macro bag
In terms of the IMF’s other economic predictions for Croatia for this year, the news was decidedly mixed. Inflation, which came in at an annualised rate of 2.2% in 2013, is now forecast to fall to just 0.5% this year, sharply down on the 2.5% level the IMF predicted last October. While, that’s nominally positive, it does still leaves open the prospect of a near-stagflationary economic environment in Croatia, characterised by falling output and prices.

On the current account front, the IMF is now predicting a surplus of 1.5% of GDP, versus the 0.7% deficit it forecasted last autumn. While that once again points to a nominally positive outcome, the reality remains that cash-strapped Croatia is increasingly less able to afford foreign goods and services, rather than pointing to any meaningful growth in the country’s exports.

On the employment front, there was no good news at all, with IMF analysts predicting that the country’s jobless rate will come in at 16.8% this year, versus their October 2013 prediction of 16.1%. IMF analysts believe unemployment could rise further in 2015 to reach 17.1%.

Overall, the IMF’s generally gloomy prognosis for the Croatian economy will pile further pressure on Croatia’s finance minister, Slavko Linic, who is currently compiling a revised budget for this year that it is hoped will receive the seal of approval from EU mandarins in Brussels at the end of April. Earlier this year Croatia entered the Excessive Deficit Procedure (EDP), under which the country must curb its burgeoning budget deficit and public debt levels. Last year, Croatia’s fiscal gap has been estimated at over 6% of GDP, more than double the EU’s desired maximum level of 3%, which the country must achieve by 2016. Meanwhile, government indebtedness reached 66.8% of GDP in 2013 - up an alarming 11 percentage points on the previous year - taking it well past the 60% level demanded by the EU.

Olli Rehn, the EU’s finance commissioner, is looking for Croatia to cut its budget deficit by 2.3 percentage points this year, but the authorities in Zagreb are reported to be looking at a more modest reduction, based on worries that cuts in public spending will further depress economic output and consumer demand in Croatia - and snuff out any light at the end of the country’s recessionary tunnel.  

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