The European Commission on Thursday mildly revised down Croatia's growth outlook from the initial 3.1% to 2.9% in 2019, due to a slower growth rate in the country's main trading partners, and in the next two years, the EC expects investments to robustly rise in Croatia, alongside a record low employment rate and a declining public debt.

“As growth in Croatia’s main trading partners moderates, domestic demand will remain the main driver of economic activity,”.the EC says in its latest document called “European Economic Forecast for 2019, 2020 and 2021”.

“Household consumption remains strong, driven by growing employment and wages as well as low inflation. Investment is set to continue growing strongly, backed by EU funds, and government consumption is also expected to support growth. The economy should continue adding jobs, but at a slower pace as labour shortages appear in some sectors,” reads the document’s section on Croatia.

The Commission also expects Croatia’s the debt ratio “to continue declining steadily as the general government balance turns from mildly positive to neutral.”

In 2020, Croatia’s growth is set to rise at a rate of 2.6% and in 2021 by 2.4%.

In the previous document, the growth was projected at 2.7% both in 2020 and 2021.

Investment growth to be at robust rate of 8.8%

The investment growth is projected at robust 8.8%, whereas in 2018, it was 4.1%. In 2020 the investment growth rate is projected at 7.5% and in 2021 at the rate of 7.2%.

“Driven by the rising uptake of EU funds by both the public and private sectors, investment growth is expected to record growth rates above those observed since 2015 throughout the forecast period. Furthermore, favourable financing conditions should remain supportive of private investment.”

The Commission notes that economic activity in Croatia regained momentum in the first half of 2019, after a weaker-than-expected performance towards the end of 2018.

“Real GDP rose sharply in the first quarter, by 1.5% quarter-on-quarter, followed by more moderate growth in the second quarter, at 0.2%. Based on high frequency indicators, growth is expected to remain moderate in the second half of the year, bringing the forecast for 2019 to 2.9%.

Domestic demand is driven by strong household consumption and is supported by public consumption and investment, which benefits from increasing use of EU funding. Despite a recovery in exports, net exports are set to negatively contribute to growth due to the strong performance of imports.

Growth driven by domestic demand

“Throughout the 2019-2021 period, domestic demand is forecast to remain the main driver of GDP growth. Ongoing improvements in the labour market, rising wages and low inflation will continue to drive household consumption. A
stronger contribution from public consumption is expected, driven by rising intermediate consumption and an Increasing public sector wage.”

The Commission also projects that overall, Croatia’s trade balance is expected to deteriorate throughout the forecast period and the current account balance is expected to gradually decrease to 0.3% of GDP by 2021.

Public finance to remain in check, with general government balance in surplus for 3 years

“In 2019, the general government balance is expected to remain in surplus for the third year in a row,” says the Commission.

“Revenues are performing strongly in spite of tax cuts, which particularly affected revenue from VAT and social contributions. Expenditure grows primarily due to wage hikes in the public sector, investment and intermediate consumption.

Tax revenues to grow at slower pace due to further tax cuts

“In 2020-2021, tax revenue is expected to grow at a slower pace than nominal GDP, due to further tax cuts. EU funds are projected to continue supporting revenues as the programming period enters its most mature stage.”

“Expenditure growth should continue in 2020 and moderate somewhat in 2021, largely due to the strong base effect of the rising wage bill, investment and capital transfers in 2018-2019. Additional savings are expected in interest payments, most notably in 2020, as a sizable portion of maturing debt is refinanced at
lower rates.”

The Commission expects Croatia’s budget to remain balanced.

“In structural terms, the general government deficit is expected to increase from 0.3% of GDP in 2018 to 1% of GDP in 2020 and decrease slightly in 2021. The debt ratio is set to continue declining strongly on the back of surpluses and nominal GDP growth, dipping below 65% of GDP in 2021.”