Croatia should brace for a recession, World Bank said in its updated spring outlook on Thursday, adding that the nation's GDP might shrink by 6.2 percent in 2020.

“After finally reaching, in 2019, the pre-2008 level of output, Croatia is set for a deep recession,” the World Bank warned.

During the global financial crisis in 2008 Croatia had entered recession which turned out to be one of the world’s longest, lasting about six years.

Around 2014 – a year after the country joined the European Union – the economy started showing signs of recovery. However, it took five more years for Croatia’s economic output to reach its pre-crisis level, in 2019.

A new deep recession seems likely now, with World Bank’s analysts calculating Croatia’s GDP might shrink by 6.2 percent.

The global pandemic and lockdowns imposed throughout most of Europe are expected to decimate the country’s tourism industry, estimated to account for nearly 20 percent of its GDP, one of the highest ratios on the continent.

Croatia’s exports will also be severely affected, as unprecedented lockdowns already slowed down economic growth in the country’s major trading partners such as Italy and Germany, and throughout the entire euro zone.

Furthermore, Croatians who had emigrated to other EU countries after 2013 – which brought Croatia’s unemployment rate to 7 percent in May 2019, its lowest level in 19 years – have now started to return to Croatia. This is expected to push the unemployment rate up, with World Bank projecting it at above 9 percent in 2020.

Meanwhile, Croatian government prepared an economic rescue package potentially worth 8 percent of GDP intended to mitigate the catastrophic effects on the local economy and labour market.

These include tax breaks for businesses, and a plan to subsidise salaries for furloughed workers for a three-month period. Earlier this month, the government reported that 65,000 companies applied for the programme, involving more than 400,000 jobs. 

Before the latest crisis, Croatia’s had a total of 1.5 million employed people, out of a population of around 4 million.

The annual fiscal impact of this rescue package is estimated at 5 percent of GDP, but will be partially financed from EU funds.

World Bank’s analysts expect Croatia’s end-of-year fiscal deficit in 2020 total nearly 8 percent of GDP. Croatia had recorded a budget surplus in 2017 – its first in 15 years – of 0.8 percent of GDP. This was followed by another surplus in 2018, at a more modest 0.2 percent of GDP.  The public-debt-to-GDP ratio also kept falling in recent years, to 74.8 percent of GDP in 2018.

But the trend is expected to reverse.

“The downward trajectory of government debt will be temporarily reversed, and by the end of the year debt could reach almost 84 percent of GDP,” World Bank said, and added that if the pandemic crisis gradually fades away by mid-2020, the economy might rebound in 2021 and 2022.

“The fiscal deficit is expected to narrow in 2021 and 2022 as expansionary measures unwind and growth picks up, but without additional consolidation it would remain high,” World Bank’s analysts said.

“The crisis can provide an opportunity to revisit Croatia’s growth model and focus on policies to increase resilience to external shocks, and raise the economy’s growth potential,” they added.