RECENT ECONOMIC DEVELOPMENTS
In the last quarter of 2017, economic growth decelerated, with a decrease in the 2017 GDP growth rate to 2.8% from 3.2% in 2016. The slowdown was due mainly to a deceleration in
government investment and a rebound in imports. Exports were the main driver of growth with a strong contribution from tourism, as overnights by foreign tourists rose by over 11%. Private consumption also made a strong contribution to growth, supported by favorable labor market developments, cuts in the personal income tax rate, and a slight recovery in consumer confidence. Finally, investment growth decelerated markedly due to the weaker absorption of EU funds, leading to a sharp fall in government investments.
The economic recovery resulted in rising employment, which, coupled with high levels of out-migration, led to a notable decline in the unemployment rate to an estimated 11% in 2017 (2.1% lower than in 2016). The broad-based growth contributed to a further reduction in absolute poverty, bringing the poverty rate (measured at US$5.5 2011 PPP per capita) down to 5.8% in 2015 from 7.3% in 2013.
Fiscal consolidation continued in 2017 with an estimated budget surplus of 0. 1% of GDP, down from a deficit of 0.9% in 2016. External debt declined to 84.2% of GDP in November 2017, 5.6% lower than 2016, driven by the continued deleveraging of banks and the private corporate sector.
Growth is expected to slow to 2.6% in 2018, following an expected fall in private consumption due to the end of the favorable tax reform effects and slowing wage growth. Exports of tourist services, after exceptionally strong growth estimated at around 6.5% in 2015–17, are expected to slow down in 2018, due also to capacity constraints. On the other hand, a better absorption of EU funds will give a boost to investment spending and eventually raise economic growth to an average of 2.8% in 2019–20. Although a further nominal consolidation is foreseen in 2018, the structural budget balance is expected to worsen, pointing to a moderately pro-cyclical fiscal stance. The government balance is expected to stay in surplus and may reach 1% by 2020, leading to a further decline in public debt to below 70% of GDP.
Positive labor market developments are expected to support the growth of disposable income for all segments of the welfare distribution, and the absolute poverty rate is expected to fall further to 4.0% in 2020.
Downside risks have moderated but are still present. As the operational restructuring of Agrokor Group unfolds in 2018, the negative effects on investment activity and private consumption might be greater than currently envisaged. The still high level of public debt makes Croatia vulnerable to interest rate shocks and worsening external financing conditions. There is also a risk that the cyclical upturn and stronger fiscal position may result in complacency and diminished reform momentum, which would have an adverse effect on growth over the medium term. Croatia’s prospects for reinitiating real convergence and promoting inclusive growth remain weak.
The currently low growth potential calls for a strong structural reform agenda. Substantial economic, social, and institutional weaknesses should be addressed to boost private sector productivity and competitiveness, raise the quality of human and physical capital, and modernize public services. This should also lead to increasing economic activity and employment, which is crucial for a further reduction in poverty.
Last Updated: Apr 19, 2018