According to the data collected published by Intesa Sanpaolo, Croatia has not yet emerged from the recession it entered in 2009 (-6%), given that a further fall occurred during 2012 (-2%) and in the first quarter of this year (-1,5%), mainly due to the weak domestic demand which weighs particularly on industry (-6,5%) and agriculture (-6,2%). The drop in private consumption has in fact subtracted 1,8% from the GDP trend due to the difficult conditions on the labor market, with the unemployment rate close to 20% and the negative trend of real wages (-2,3%). The contribution to growth provided by the demand for investments was also negative the variation of which, although improving if compared to the previous year, was still -4,6%. L'adjustment of the public budget it in turn led to a contraction in public consumption of 0,8% in real terms which was reflected in -0,2% of the GDP. Due to the sharp fall in imports and the growth, albeit slight, in exports, the net trade balance was the only item in the national accounts which provided a positive contribution to the economic trend.
The most recent economic data highlight a still uncertain path of the economy, given that, despite a gradual improvement, for the whole of 2013 the GDP trend will still remain in negative territory (-0,9%). The partial recovery of the economy will be favored not only by the strengthening of exports in the second half of the year, but also by contribution from investments, also thanks to the funding for infrastructure made available by the EU fund with the entry of Croatia into the EU, the incidence of which will however still be contained in the short term but more accentuated next year. The demand for private consumption is still negative, but improving, thanks to an expected improvement in the labor market, while due to fiscal consolidation, public consumption could fall further. It is expected that the strengthening of the economy will continue in 2014 with a GDP dynamic in positive territory (1%). In this perspective, weak domestic demand will act as a buffer against inflation, expected to average around 2,8% in 2013 and 2,3% in 2014, also thanks to modest external pressures deriving from a trend in oil prices expected to remain contained.
In 2012, the public deficit fell to 3,8% of GDP from 5,7% in 2011. Despite the unfavorable economic conditions, the restrictive fiscal policy contained the deterioration of the public budget in 2012. However, the GDP growth forecasts formulated by the Government appear rather optimistic e the European Commission, which expects a 1% contraction of GDP, believes that the public deficit could be 4,7% this year due to adverse economic conditions, despite the fiscal measures that the government authority defined in the budget review of last March 21st. The EC expects that, with unchanged legislation, the deficit could rise to 5,6% in 2014. The country will therefore have to adopt a more incisive fiscal policy to adjust the public budget and avoid the opening of an excessive deficit procedure.
In this scenario, public debt amounted to 56,3% in 2012. Given the prospects for the deficit and the weak economic dynamics, the EC expects the debt-to-GDP ratio to further increase to 58% in 2013 and exceed 60% in 2014. The ratio of official reserves to short-term external debt alone is expected to exceed unity in 2013, but the reserve cover ratio, i.e. the ratio of foreign exchange reserves as of 2012 to external financing needs for the current year (sum of current account deficit and maturing external debt commitments) is estimated to be less than unity. To meet the financial needs, mainly due to the repayment of the foreign debt which has accumulated over the years exceeding 100% of GDP, the country remains vulnerable to the availability of external finance, whether in the form of renewed debt or capital inflows for investment.
Croatia's entry into the EU is expected to boost the country's economic growth in the medium to long term thanks to higher capital inflows from other EU members, enhancing its infrastructure also thanks to capital account transfers through EU funds. The adoption of the necessary structural reforms in terms of macroeconomic stability and reorganization of production strategies could thus help overcome some of the weaknesses present in the architecture of the Croatian economic and institutional system, where it is external imbalance, with external debt now over 110% of GDP in 2012, to represent the most dangerous element of vulnerability. Starting to fix a public deficit estimated by the EC at over 4% in 2013.
