New Market Research Report: Croatia Business Forecast Report Q1 2014

From: Fast Market Research, Inc.
Published: Sun Nov 10 2013

A modest recovery in private consumption will be insufficient drive a significant economic recovery in Croatia in 2014, with fiscal consolidation and weak investment spending set to weigh on headline growth. We have pencilled in below-consensus real GDP growth of -0.4% in 2013 and 0.6% in 2014.

Croatia's current account surplus will peak at 0.8% of GDP in 2013, on the back of robust tourism receipts and a shrinking income account deficit, before narrowing to 0.5% of GDP in 2014. The smaller surplus in 2014 will be driven by the growing merchandise trade deficit and a sharp increase in current transfer outflows to the EU.

Croatia's fiscal deficit will expand to 4.9% of GDP in 2013 and come in at 4.5% of GDP in 2014, as low budget revenues and elevated expenditure derail the government's fiscal consolidation programme.

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Although the likely imposition of the EU's Excessive Deficit Procedure before end-2013 should lead to a modestly narrower budget in 2014, low tax revenues and a failure to rein in spending more drastically will ensure that Croatia's already bloated public debt load continues to rise over the next few years.

Inflation will continue easing in Croatia over the next few quarters, due to base effects from an energy price hike in 2012, lower food prices and subdued domestic demand. Although inflation will average 3.0% in 2013 and 2.3% in 2014, the long-term depreciation of the kuna will prevent a more significant drop in prices going forward.

Despite Croatia having only joined the EU on July 1, we believe the country's relationship with the bloc is likely to deteriorate over the coming months, after the government's failure to implement a European Arrest Warrant (EAW) issued by Germany.

Major Forecast Changes

Recently released data from the National Bank of Croatia (HNB) showed that the deficit shrank to EUR1.7bn in H113, from EUR2.1bn in H112, and expectations of a robust surplus in Q313 have prompted us to revise our C/A forecast to 0.8% of GDP in 2013 (from -0.3% previously).

Key Risks To Outlook

A more pronounced slowdown in eurozone growth than we are currently forecasting would weigh considerably on Croatian growth. The country is heavily reliant on the external market for growth, particularly while government expenditures are dragged down by fiscal austerity and as the recovery in consumer spending remains reasonably sluggish.

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