The European Commission projects in its Autumn 2020 Economic Forecast, published on Thursday, that Croatia's economy will contract 9.6% this year, increase 5.7% in 2021 and reach the pre-crisis level in 2022, rising by 3.7%.

“Croatia’s economy is expected to contract sharply in 2020 due to the impact of the COVID-19 pandemic. Output should partially recover in 2021, thanks to private consumption and investment, but is not expected to reach its pre-crisis level by 2022,” the Commission says.

In the Summer 2020 Economic Forecast, published on July 7, the Commission projected that Croatia’s economy would contract by 10.8% this year and increase by 7.5% in 2021.

In the Spring 2020 Economic Forecast, the first after the outbreak of the coronavirus pandemic, published on May 6, the Commission projected that Croatia’s GDP would contract by 9.1% this year and increase by 7.5% in 2021.

“Uncertainty and lingering travel restrictions weigh on exports, including tourism. The labour market is expected to recover slowly over the forecast period. Following a sharp deterioration, public finances should improve in 2021 and 2022,” the Commission says in the latest forecast, adding that the “current account, however, is expected to remain in deficit only in 2020 and 2021.”

“Potential introduction of stricter COVID-19 suppression measures presents a negative risk to this scenario in the short term,” the Commission says but adds that “investment supported by the Resilience and Recovery Facility constitutes an upside risk, as it is not included in this forecast due to scarce available information.”

“The labour market responded quickly to the disruption earlier in the year with unemployment on the rise since April,” the Commission says and adds that “the seasonal rise in employment due to the tourist season was less pronounced than in recent years. Labour market conditions are expected to deteriorate further in the second part of 2020, as government wage support measures are largely set to expire.”

Low inflation, 6.5% budget deficit, 86.6% public debt-to-GDP ratio

The Commission says the “recovery should be slow as neither employment nor unemployment are likely to reach their 2019 levels by the end of 2022. Nominal wage growth should be subdued in 2021 and 2022, which should help offset the negative impact of the sizeable GDP drop in 2020 on unit labour costs.”

“Energy prices should drive consumer prices in the short term as core inflation is expected to stay low stable. The HICP inflation rate is forecast to drop to 0.1% in 2020 and pick up to 1.5% by 2022,” the Commission says.

It notes that public finances bear the brunt of this year’s crisis. “In 2020, the general government balance is expected to plummet to -6.5% of GDP because of the strong economic contraction and measures aimed at preserving employment and businesses. The most significant among these measures (which collectively add up to 3% of GDP) concerns subsidies for employee wages.”

“Tax revenues should contract strongly as household and tourist consumption decrease, particularly affecting VAT revenues. The drop in contributions and personal income tax revenue should be less pronounced as government measures have protected employment and wages. Wage subsidies and the public wage bill should drive strong expenditure growth while previously agreed collective agreements are implemented. Interest spending should decrease in spite of substantial new borrowing as maturing debt is refinanced at very low rates,” the Commission says.

“In 2021-2022, tax revenue is expected to recover strongly on account of household consumption, employment and wages. The rebound should be relatively sharp for contributions and VAT and somewhat softer for income taxes, as personal income tax rate cuts take effect in 2021 and companies carry forward their losses,” said the Commission.

“The take-up of EU funds should boost revenues in 2021 before moderating in 2022. Expenditure growth should subside in 2021, after a strong 2020, and pick up in 2022. Additional savings on debt servicing are expected.”

The Commission says the deficit is expected to drop from 6.5% of GDP this year to 2.8% in 2021 and deteriorate to 3.2% in 2022, “based on a no-policy-change assumption.”

“The debt ratio is set to spike in 2020 due to both the large drop in GDP and the accumulation of new debt to finance the deficit. After reaching 86.6% in 2020, it should resume its pre-crisis downward path” to 82.4% in 2021 and 81.7% in 2022.

The Commission says the forecast for the EU is subject to extremely high risk and uncertainty due to the epidemiological situation.

The Autumn 2020 Economic Forecast projects that the euro area economy will contract by 7.8% in 2020 before growing 4.2% in 2021 and 3% in 2022. The forecast projects that the EU economy will contract by 7.4% in 2020 before recovering with growth of 4.1% in 2021 and 3% in 2022.

The largest drop this year is expected in Spain (-12.4%), followed by Italy (-9.9%), and the smallest in Lithuania (-2.2%) and Ireland (-2.3%).