The Croatian Central Bank (HNB) expects an 8% drop in this year's real GDP and a 5.2% growth in 2021, it was said on Wednesday after a meeting of the HNB Council.
The projection is based on the assumption that the epidemiological situation will not require tighter social distancing restrictions which could have a negative impact on economic activity, the HNB said.
After a strong contraction in Q2 due to the pandemic and the restrictions imposed to contain it, economic activity partially recovered in Q3. The labour market saw positive trends too, with an increase in employment and a decrease in unemployment in July and August. Despite favourable recent trends, real activity and labour market indicators remain unfavourable in comparison with the period before the pandemic. In Q3 recovery slowed down simultaneously with a deterioration of the epidemiological situation, with consumer, services and industry confidence deteriorating in September, the HNB said.
The annual inflation rate in August was -0.1% due to a negative contribution of energy prices, while core inflation was 1.2%.
The current and capital accounts balance in Q2 deteriorated due to a drop in net export services, mainly as a result of a strong decline in tourism revenues. The liquidity of the domestic financial system remained very high under the influence of the HNB’s very expansionary monetary policy. However, the annual growth of lending slowed down, corporate lending more than household lending, the HNB said.
In July, the central government deficit increased by HRK 2.9 billion on the year, an improvement on the markedly unfavourable trends in Q2 which increased the general government debt at the end of June to 85.3% of GDP, up 12.1 percentage points from the end of 2019, the HNB said.
GDP to drop 8% this year, increase 5.2% in 2021
Due to favourable export results, the central bank expects a somewhat faster recovery than in July’s projections.
This year’s real GDP is expected to drop 8%, as against the -9.7% projection from July, while a 5.2% increase is expected next year, as against the +6.2% projected in July.
If the epidemiological situation deteriorates in the absence of an effective medical solution, the risks of achieving the latest projections remain negative, the HNB said.
Despite only gradual recovery, the HNB predicts that the inflation of consumer prices could rise to 1.1% in 2021 after slowing down to an extremely low 0.2% this year, largely due to cheaper oil products.
Tourism revenues will considerably decrease this year and have a negative effect on the surplus on the current and capital accounts, which could dip to 3.7% of GDP, and the same surplus is expected in 2021. Contributing to the balance of payments is an increase in EU funding which will support investment and facilitate the financing of extraordinary government expenses. The HNB will retain an expansionary monetary policy, which will contribute to maintaining favourable financing conditions and a relatively mild increase in bank lending, the central bank said.
The HNB Council also considered the latest financial stability risk estimate, concluding that despite more favourable economic projections, exposure to systemic risks remains high.
The measures the government, the HNB and the HANFA financial services regulator have undertaken since March have markedly alleviated the pandemic’s effects on the economy and maintained the stability of the financial system and relatively favourable financing conditions, reducing short term risks to financial stability, but it is possible that some risks will materialise later on, the central bank said.
Credit institutions continue to record high levels of capital and liquidity but their profitability markedly decreased in H1. Although the share of non-performing loans is stagnating thanks to repayment moratoriums, banks have reclassified performing loans as markedly higher risks. The risk of banks’ high exposure to the state via lending and investing in securities has additionally increased after a strong fiscal response to the crisis which was financed on the most part on the domestic market, the HNB said.
Slower economic recovery and an increase of the private sector’s debt would reduce the ability to service debts, which would additionally jeopardise the performance of corporate and household loans, the HNB said.
