Intellinews Croatia Country Report - November 2011

Countries covered: Croatia The IntelliNews Croatia Country Report comes out monthly, and covers the major macroeconomic indicators and trends in Croatia, as well as important political and business developments. Prepared by IntelliNews analysts who are 'on the ground' and native to the region, it provides a review of important development supported by accurate data from a wide range of often hard to get statistics, plus our take on what the developments mean.

Additional Information

A new government led by the centre-left Social Democrats stepped into office in Croatia following the December 4 elections, promising to leave the country out of recession via implementing strict fiscal rules. The coalition government is due to debate the 2012 budget draft in February after the former cabinet approved an interim first-quarter financing. This year’s budget will include tax hikes and will aim to preserve the country's credit rating and ensure lower interest rates and favorable conditions for loan repayment.

Fitch Ratings said the new cabinet needs to launch fiscal consolidation that reduces the deficit and stabilises the debt ratio, as well as to enhance competitiveness in order to boost growth if it wants to ease the pressure on the country’s ‘BBB-’ rating. Croatia’s joining the European Union in July 2013 will have a long-term positive impact since it will support governance, fiscal policy and FDI and unlock external financial sources. Yet, the nation will have to deliver on its ambitious fiscal goals first in order to reap the accession benefits. The World Bank said it sees the Croatian economy shrinking 1% this year after expanding 0.5% in 2011, which will make a planned 1% reduction of the fiscal deficit very difficult and will as a result continue to raise the public debt to up to 60% of GDP.

Latest data of the statistics office showed Croatia’s GDP increased by a real 0.7% on the year in the third quarter of 2011, slower than a real 0.8% y/y in the second quarter. The third-quarter annual increase was driven by slightly higher household consumption and rising exports. The eurozone crisis, however, is expected to have had an adverse effect on the Croatian economy in the final quarter of 2011 and to cast a gloom over 2012.

The country’s industrial production fell by 0.3% on the year in November after increasing 0.6% a month earlier. January-November industrial output contracted by 1.4% compared to the like period of 2010. The unemployment rate increased to 17.9% in November from 17.4% in October but was down by 0.4pps compared to November 2010. Prices kept climbing by the same speed in November as they did in the previous month. Inflation rose by an annual 2.6% in November after accelerating by the same pace a month earlier. The PPI index increased by 6.8% on the year in November after rising at the same annual rate in October.

The consolidated central government deficit widened an annual 11.8% in the first ten months of 2011. The general government deficit for 2011 will be close to 5% of GDP, which is just below the 5.4% of GDP target, the outgoing government has said. The central bank warned the country should take urgent fiscal measures and cut spending by some EUR 1.2bn in 2012 otherwise its deficit could reach 7.5% of GDP in the next two to three years and its public debt might exceed 75% of GDP in 2014.

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