ZAGREB, 13 July 2022 – Real GDP growth could be 5.5% this year and 2.5% in 2023, while inflation could slow from 9.4% this year to 4.6% in 2023 , the National Bank of Croatia (HNB) announced on Wednesday.

According to the HNB’s Summary of Macroeconomic Trends and Estimates, the economic repercussions of the Russian invasion of Ukraine, the continued rise in energy and commodity prices, and the disruption of global supply chains have not not seriously affected Croatia’s economic growth prospects.

However, adverse global circumstances and pronounced inflationary pressures could have a greater impact on domestic economic trends in 2023, when real growth in domestic activity is expected to slow to 2.5%.

Risks remain pronounced over the 2022-23 projection period, with the prevalence of risks that could negatively impact economic growth, such as a gas embargo, rising food and oil prices. energy, tighter than expected financing conditions and a deterioration of the covid situation.

HNB Governor Boris Vujčić told the press that growth in the second quarter of this year should be stronger than in the first quarter, when it was 7%, that the tourist season should bring a very strong contribution in the third quarter and that “solid growth” was expected in Q4.

He said the fourth quarter was much more uncertain and a lot depended on the evolution of the energy market and the possibility of a gas embargo for Europe, which would significantly change the economic outlook for the fourth quarter and 2023.

Vujčić said a recession was possible next year, mainly due to a halt in gas deliveries to Europe. The recession could first occur in Croatia‘s main trading partners, Germany and Italy, and then spread to Croatia, he added.

As for this year’s tourist season, he said arrivals were almost the same as in 2019, while accommodation and hotel prices increased by 20-30%, which would indicate a season tourist record financially.

Inflation in June exceeds 11%

Consumer price inflation this year could accelerate to 9.4%, mainly due to the considerable rise in global energy and commodity prices, according to the HNB. In the domestic market, energy and food prices continue to increase the most, but the rise in prices of other goods and services is also gradually accelerating.

Vujčić said that inflation is expected to increase to over 11% in June, over the summer it should be at 11% or 12%, while it should start to slow down at the end of this year and especially at the beginning of 2023.

Growth in the main sub-components of inflation is expected to slow in 2023 and so is headline inflation, to 4.6%. However, this forecast depends on the stabilization and, later this year, the gradual decline in energy and raw material prices in the global market, according to the HNB.

Inflation projections for this year and next are dominated by risks that could raise inflation further, including rising energy and commodity prices and stronger wage growth.

Vujčić said that the fight against inflation foresees higher interest rates and that the European Central Bank has announced that this could already start this month. “I expect that to continue into the fall.”

The aim is for HNB and ECB interest rates to be the same from January 1, 2023 and Croatia’s entry into the eurozone, he said.

Reserve requirements will be reduced to 1%, no more foreign currency debt obligation

The HNB Board today decided to reduce the banks’ rate for calculating reserve requirements from 9% to 5% in August and from 5% to 1% in December, which is the reserve requirement rate in the zone euro, said Vujčić.

It also decided that the minimum amount of foreign currency claims be reduced from 17% to 8.5% in August and abolished in December.

The effect of the first measure will be the release of HRK 34.2 billion in required reserves, while the second will allow banks to release or otherwise dispose of 5 billion euros, Vujčić said.

Historically low interest rates

He said today’s decisions would also affect interest rates by making funding cheaper for banks, so they would have less reason to raise them, especially on new loans. They can reduce them further, depending on their trade policy, he added. “But we’ll see where we are at the start of next year.”

Vujčić said interest rates in Croatia were historically low, while those in non-euro EU countries were considerably higher, twice as high for home loans.

Real wage decrease and nominal wage increase

This year, employment should continue to grow and unemployment to decline, with nominal wages rising and real wages falling.

Vujčić said the current situation in the labor market was unusual, as the private sector saw a sharp increase in nominal wages, of around 10%, mainly due to the difficulty in finding labor qualified, while wage increases in the public sector were slower.

Considering the two sectors together, wage growth is slightly lower than inflation, and this year the real wage is expected to decline by 1.5 to 2 percent, Vujčić said, adding that increases in wages should keep pace with inflation. only in the private sector.

The euro zone and Schengen encourage foreigners to buy real estate more

Speaking about the property market, Vujčić said that property prices in the first quarter were up 13.5% year on year and that this increase was also due to very low interest rates on savings, which are even negative in neighboring countries, prompting foreigners to buy because of the higher yield.

The increase in real estate prices is also due to the government’s subsidized housing program as well as the acceleration of inflation.

Vujčić said that Croatia’s joining the euro and the Schengen area would be an additional incentive to buy real estate. On the other hand, if the rise in ECB interest rates also affects those on deposits, this rise should also reduce the incentive to buy real estate, but this cannot happen overnight, he added.

Market activity may slow due to expected tightening of funding conditions and adverse revenue developments.

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