Croatia GDP Q1 2017

Croatia

Croatia: GDP growth slows in Q1 on more negative contribution of net foreign demand

June 1, 2017

The Croatian economy decelerated in the first quarter of 2017 but nevertheless recorded another period of healthy growth, supported by strong private consumption and a pickup in fixed investment, but constrained by a negative contribution of net foreign demand. GDP growth softened from the 3.4% recorded in the fourth quarter of last year to 2.5% in Q1, the weakest expansion in over one year but nonetheless marking the tenth consecutive quarter of growth.

Croatia’s economy continues to be underpinned by robust domestic demand, which contributed 3.8 percentage points to Q1’s growth rate. The ongoing expansion in private consumption—which grew 3.5% in Q1, only marginally down from Q4’s 3.7% increase—has been underpinned by several factors, such as stronger tourism activity, tight labor market conditions, re-leveraging and income tax cuts. Stronger business sentiment, recovering construction activity, rising profits—in part stemming from lower corporate taxes—and expanding business lending led fixed investment to grow 5.4%, which was a stronger expansion than Q4’s 4.6%. Conversely, growth in government consumption moderated from 1.7% in Q4 to 1.6% in Q1.

Meanwhile, the external sector’s contribution to growth was negative. Growth in imports of goods and services accelerated from 5.0% in Q4 to 10.1% in the first quarter of 2017, reflecting strong domestic demand. Robust demand from the country’s main trading partners in the EU caused exports to expand 8.6% in the first quarter, up from the 6.8% increase observed in Q4, although growth in service exports came to a virtual halt.

Despite decelerating in the first quarter, still-healthy growth shows that the recovery has firmed up. Going forward, growing tourist inflows, improving labor market conditions and rising remittances will underpin household spending, while strengthening construction activity and healthy demand from the Euro area should spur fixed investment. Nevertheless, there are clouds on the horizon, as Agrokor’s restructuring could generate spillover effects in the form of rising vulnerabilities in the banking sector and weaker business and consumer confidence.

FocusEconomics panelists expect GDP to rise 2.9% in 2017, which is unchanged from last month’s estimate. In 2018, the panel expects economic growth of 2.6%.


Author: Massimo Bassetti, Economist

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