Croatian National Bank (HNB) governor Boris Vujcic said on Sunday he expected growth of over 5% this year, significantly more than currently forecast, and that a possible stoppage of gas deliveries could lead to a recession next year.

Speaking at the opening of the HNB’s 28th economic conference in Dubrovnik, he said the growth rate in Q1 was 7% and that in Q2 it could be higher.

In Q3 we have very good bookings in tourism, so a better season can be expected than in the record year for tourism, 2019, “not so much because of more arrivals as because of higher prices by as much as 40%,” Vujcic said.

Three quarters will be very good and economic growth can be expected to slow down in Q4, he added.

The biggest risk is neither inflation nor interest rates but the energy market situation, with a possible stoppage of gas deliveries, which could lead to a recession in 2023, Vujcic said, adding that the HNB expected inflation to continue to increase by the middle of this year and the 2022 inflation rate close to 10%.

The inflation in Croatia as well as other countries is primarily a consequence of energy and food price rises, and energy prices depend to a large extent on the war in Ukraine, although they began rising before that, he said..

As long as the situation is such, it’s difficult to expect energy price growth to calm down, although the base effect will change, he added.

During the pandemic crisis, energy prices were at a historical minimum and are now rising because of increasing demand and economic recovery, the war in Ukraine causing additional pressure, Vujcic said, adding that it was up to the government to decide which instruments to use to impact food and energy prices.

“The longer this crisis lasts, the emptier the bag with those instruments,” he said, adding that it was in Croatia’s interest to change to the euro with the smallest impact on prices and that due to the high inflation, the effect would be marginal.

A bigger concern is the rise in energy and food prices for other reasons, Vujcic said.

“The effect is already positive because of the announced change of the rating and on the financial market because at the moment Croatia has lower financing and borrowing costs… The markets have incorporated that in interest rates. In EU countries outside the euro area, interest rates are much higher than in Croatia.”

The long period of low and negative European Central Bank interest rates caused the money to move to the real estate sector, which contributed to the rise in property prices, Vujcic said.

“A large part of that rise does not come from loan-financed buying, About 50% of all transactions are without loans, so there is no major risk for the stability of the banking system,” he said, adding that due to the rise in prices, real estate was less affordable for young people and first-time buyers. “The rise of interest prices will reduce the pressure on the real estate market.”

The Dubrovnik conference will discuss post-pandemic crisis challenges and focus on inflation.

Vujcic said that since Croatia would join the euro area on 1 January 2023, the conference would also discuss European fiscal rules, monetary policy and the expected interest rate growth as well as “problems in supply chains, which lead to price rises and production standstills, and the energy crisis as a consequence of geopolitical tensions and the war in Ukraine.”