Uncertainty clouds Croatian economic outlook

By bne IntelliNews July 1, 2009

Guy Norton in Zagreb -

Government officials in the Croatian capital Zagreb are no doubt praying for a long, hot summer after the latest economic data from the country showed the chill winds of recession were blowing strongly at the start of the year.

If the weather gods smile kindly on the travel hotspot, it could make the all the difference between Croatia entering a shallow or a deep downturn, given that tourism accounts for around 20% of GDP and roughly 45% of foreign exchange earnings.

According to figures released at the end of June by Crostat, the Croatian statistics agency, in the first quarter GDP contracted by 6.7% on year in real terms - a figure that generated public dismay in a country which has enjoyed a decade of stable, if unspectacular, growth.

The grim statistics marked the first drop in GDP since the third quarter of 1999 and the sharpest fall since of the end of 1993 - when Croatia was still mired in a bitter war with neighbouring Serbia. Over the past five years, real GDP has expanded at an average annual rate of just under 5%, more than twice the levels registered in Western Europe but half those recorded in the Baltics. "The message from the first-quarter GDP figures is not a good one and came as an unpleasant surprise for the Croatian public, if not for most analysts," says Alen Kovac, macroeconomist at Erste Bank in Zagreb. Kovac expects that the figures for the second and third quarters will show some improvement, "but only a little."

The biggest falls in economic activity in the first three months of the year were in household consumption and capital investment, which have both been the key growth drivers in Croatia in recent years. Household consumption slumped by 9.9% compared with the first quarter of 2008, due to a combination of falling employment, lower net salaries and the reduced availability of credit. Meanwhile, capital investments shrunk by 12.4% as a result of the postponement of both private and public sector projects.

Dire predictions

The latest figures cast doubts upon the centre-right coalition government's forecast of only a 2% downturn in economic growth for the whole of 2009. Among the major international donors, the World Bank and the International Monetary Fund see this year's contraction at 3-4%. Investment banking analysts are more bearish still, with Timothy Ash, emerging markets strategist at RBS in London, commenting that based on the first quarter performance, full-year GDP could fall by as much as 5% this year. "Croatia is likely to witness a painful period of economic adjustment just like other countries in the rest of the Central and Eastern European region. Nobody is immune to the current economic crisis, with every vulnerability likely to be exposed."

The steep drop in economic growth inevitably drew public calls for urgent government action by both employers' and employees' representatives in Croatia. Djuro Popijac, general director of the Hrvatske udruge poslodavaca (HUP) employers association warned that without remedial measures growth would continue to decline. Meanwhile, Ozren Matijasevic, president of the Hrvatska Udruga Sindicata (HUS) trade union association, says the latest figures demonstrate that the government is failing to deal with the effects of the global economic slowdown. While the HUP has called for further public sector reforms, any measures that will entail further lay-offs or wage cuts are likely to be fiercely resisted by the HUS. "There are no easy solutions for the government," says Erste's Kovac.

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