A report released by the European Commission (EC) on Thursday predicts that Croatia's economy will grow by 2.8 percent in 2018, unchanged from the forecast it made three months ago. The EC attributes the projected growth to increase in personal consumption and investments, warning that a disorderly restructuring of Agrokor could affect growth.

The European Commission’s Spring 2018 Forecast said Croatia’s GDP growth could potentially slow down to 2.7 percent in 2019.

“Croatia’s economic activity lost some steam at the end of last year, weighing on the still positive growth outlook for 2018 and 2019,” analysts said.

“A pickup in investment is set to support the pace of growth, while private consumption remains robust. Strong employment growth helps keep the unemployment rate on a fast-declining path. The general government headline balance is projected to remain in surplus, leading to further reductions in the debt ratio,” they added.

The report also mentioned the economic slowdown in late 2017, saying that “following three solid quarters, the last quarter of 2017 was weighed down by a marked decline in the take-up of EU investment funds, particularly in the public sector.”

“Together with the impact of the Agrokor crisis, this resulted in a slowdown in investment in 2017, and lower-than-expected real GDP growth of 2.8 percent,” according to the report.

The EC’s economic analysts had earlier projected Croatia’s 2017 GDP growth at 3.2 percent.

“Overall, the rate of growth is likely to have peaked, and is expected to slightly moderate over the forecast horizon. The economy, however, remains on track to reaching its pre-crisis volume of output in 2019. With strong employment growth and rising wages (evidenced by administrative data), outbound migration is expected to ease,” the report said.

The Commission also warned about the potential risk for the overall economy as a result of Agrokor’s creditors’ settlement agreement, which is still pending and due to be agreed by July 10. “A successful outcome could increase production and investment in the group and its suppliers, while a failure to agree a final settlement could result in financial and operational disruptions,” analysts said.

The report also noted a slowdown in Croatia’s exports.

“A slowdown in goods exports that started at the end of last year has continued in the first months of 2018, in line with weaker industrial production data… At the same time, positive readings in consumer sentiment and solid retail trade data indicate sustained growth of private consumption, while promising early booking indicators and growing pre-season arrivals signal another strong tourist season. However, due to the significant import content of final demand, imports are projected to continue detracting from GDP growth,” the report said.

Real GDP growth is expected to remain unchanged at 2.8 percent in 2018, inching down slightly to 2.7 percent in 2019. Personal consumption is expected to drive growth over the due to continued wage and employment growth, and increasing amounts of remittance sent from Croatians working abroad, in an environment of low inflation and falling interest rates.

A sizeable pickup in project contracting toward the end of 2017 should give rise to higher EU-funded capital spending this year and next, particularly in the public sector. Despite ongoing deleveraging, credit flows to the corporate sector are slowly picking up as financing conditions improve.

“Overall, investment is projected to contribute more strongly to growth than in recent years,” the report said..

Goods exports are projected to progressively slow this year and next, despite solid external demand and further, albeit more modest, market share gains.

Tourism is projected to continue posting strong figures, also on account of growing arrivals outside of the main season thanks to sizeable investment in the hotel sector in recent years.

As domestic industrial production lags, imports are projected to grow again faster than exports, with a negative impact on the external balance of goods and services, despite improved terms of trade. The negative balance of primary income is also set to deteriorate mostly on account of higher profits in the banking sector.

The current account surplus is projected to drop below 3 percent of GDP in 2018, and to decrease further in 2019.

The full effects of last year’s public sector wage increases are kicking in this year. Coupled with reported labour shortages in tourism and construction, wages are projected to rise steadily over the forecast period. Productivity is expected to increase at broadly the same pace, leading to stabilisation of unit labour costs. Inflation remains subdued, as price movement in the volatile components of food and energy are expected to largely offset each other.

“Overall, the inflation rate is projected to remain at 1.4 percent in 2018, and increase slightly next year,” the Commission said.

The report also forecast that Croatia’s GDP-to-debt ratio will continue to decline “as government balance remains positive.”

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