EU10 and Croatia Output Returned to Pre-Crisis Levels

April 22, 2011

ZAGREB, April 22, 2011 — Two and a half years after the global financial crisis broke, the economic activity in the EU10(1) rebounded in parallel with the EU15(2), according to the World Bank’s new EU10 Regular Economic Report launched today in Zagreb. Growth strengthened in the second half of 2010, supported by restocking, a double-digit expansion of exports, and a rebound in consumption, states the report. Given the prolonged recession in Croatia, output declined by 1.2 percent in 2010 after a six percent decline in 2009, driven by domestic demand contraction.

The pace of the recovery in the EU10 and Croatia is set to accelerate in 2011 and 2012, but it also differs across the countries. The return to pre-crisis levels was helped by aligned business cycles and close trade and production linkages with the EU15. In 2011 and 2012 firms are expected to raise investment with higher capacity utilization and strong global demand for capital goods and durables, and households to step up consumption with improved confidence about future prospects.

The performance of Slovakia and Poland is set to remain solid thanks to low pre-crisis imbalances, deep integration into European production networks, EU funds, and, in the case of Poland, solid consumption.  Estonia, Lithuania, and Latvia are likely to build on the export-led upswing as domestic demand continues to recover. Romania and Bulgaria, where the crisis hit later than elsewhere, are set to see the biggest improvements in growth in 2011.  Growth in Slovenia, the Czech Republic, Croatia and Hungary is set to increase at a more measured pace, in part because these countries have already converged more to EU income levels.

“The strong rebound in global trade benefited exports in the EU10, which recovered to pre-crisis levels by the end of 2010,” said Kaspar Richter, Senior Economist in the World Bank’s Europe and Central Asia Region and lead author of the report. “However, growth prospects are subject to risks related to the feeble private investments, winding down of construction projects, and tight international financial constraints,” added Richter.

“Lead indicators point to a slow and fragile recovery of Croatian economy, while the projected 2011 growth of 1.5 percent faces a number of risks, since prospects for exports, credit and employment growth depend on robust growth in the EU15 and sustained improvement of Croatia’s competitiveness” said Sanja Madzarevic Sujster, Senior Country Economist and co-author of the report.

The report outlines that the pace of recovery remains too subdued to generate jobs, and employment is still below pre-crisis levels. In Croatia, economic growth by itself will not suffice to substantially lower the unemployment rate and structural labor market reforms are necessary to enhance the adaptability of Croatian labor market and improve labor market outcomes.

Structural policies in support of growth can help to overcome the financial, labor, and fiscal challenges. Safeguarding macroeconomic stability and supporting long-term growth prospects through shoring up fiscal sustainability and improving country’s competitiveness remain a priority for Croatia. Croatia is targeting ambitious fiscal adjustments in 2011-2013: public finances are set to improve on the basis of planned fiscal measures and improving cyclical positions. The implementation may, however, prove to be difficult given the political cycle and spending pressures, while adjustments are needed in social sectors, public administration, state aid, education, innovation, and business climate.

[1]The EU10 countries include Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.

[2]The EU15 countries include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom.

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