IMF says Croatia's economy to contract 0.8% in 2014

By bne IntelliNews May 20, 2014

The IMF said on May 19 it expects Croatia’s economy to contract 0.8% this year due to feeble domestic demand, thus downgrading its previous forecast for a 0.6% contraction. The latest projection was announced as part of the recently finished Article IV consultations with local authorities. Otherwise, the older forecast was made in April in IMF's most recent World Economic Outlook (WEO) edition.

However, the Fund sees the economy recovering in 2015, when the GDP is expected to rise by 0.5% due to a strengthening of external demand. Long-term potential growth is projected at 2%. The IMF said in a statement that the macro policies which could bring a rapid economic growth are still beyond reach as the fiscal policy has run out of space while the monetary policy has been constrained by the effort to keep the kuna-euro exchange rate stable.

In 2014, the private sector demand and the fiscal consolidation will remain weak, while exports would pick up influenced by the improved situation in the euro area. The IMF sees the private sector debt restructuring and the implementation of measures to attract foreign direct investment as the best means of reviving the Croatian economy in the short and medium term. Inflation is seen remaining low at 0.5% this year and quickening to 1.1% in 2015, while the unemployment rate is projected to continue its upward trend to 16.8% in 2014 and 17.1% next year from 16.6% in 2013.

The IMF also expects the general government deficit to improve to 4% of GDP in 2014 and 2.9% of GDP in 2015 from 5.4% of GDP in 2013. The general government debt is seen rising to 64.7% of GDP this year and to 66.8% of GDP in 2015. Croatia entered into the EU's excessive deficit procedure at the end of January with the EC recommending that the country cut the deficit to 2.7% of GDP in 2016.

The IMF recommends that Croatia shall stretch the fiscal adjustment while the central bank shall continue to accumulate foreign exchange reserves until it meets the standard adequacy metrics. The Fund stressed that Croatia needs reforms to raise labour force participation, restructure state-owned companies, improve the business climate and insure a rapid absorption of EU funds.

Croatia key macroeconomic indicators 2013 estimate 2014 projection 2015 projection
GDP y/y % growth -1.0 -0.8 0.5
Net exports y/y growth 0.1 0.5 0.3
Unemployment (ILO, %) 16.6 16.8 17.1
CPI inflation (average) 2.2 0.5 1.1
Average monthly nominal wages (y/y %) 0.8 ... ....
General govt balance, % of GDP -5.4 -4.0 -2.9
General govt debt, % of GDP 60 64.7 66.8
Source: The International Monetary Fund    


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