THE NEW FORECAST of the Croatian National bank warns that the coronavirus will affect the Croatian economy more than the initial stage of the last recession.
The Croatian National Bank (CNB) predicts that economic activities in Croatia will decline by 9.7 percent this year compared to last year. That is, according to the "more favorable" and more probable, or, as the central bank says, basic scenario. The coronavirus crisis will cause a larger decline in the gross domestic product (GDP) than the global financial crisis, which caused a 7.4 percent decline in the economy in 2009.
A larger decline in economic activities than in 2009
"Croatia's GDP of the entire 2020 might decrease by 9.7 percent, which is a more drastic decline in economic activities than the one recorded after the escalation of the global financial crisis. At the same time, a decrease in all the elements of the domestic and foreign demand is expected," reads the new issue of the CNB publication Macroeconomic Trends and Forecasts.
The central bank points out that all forecasts related to the coronavirus crisis are extremely uncertain, as no one can predict the future spread of the coronavirus and the likelihood of finding a cure and vaccine at this time. Therefore, the forecasts are subject to changes.
Pessimistic scenario
Just in case, the CNB also created a pessimistic scenario, which they hope is less likely, and which factors in a second wave of the coronavirus pandemic. In that case, the publication points out, the decline in the Croatian GDP this year would be even greater and would amount to 11.4 percent. However, it should be noted that CNB's forecasts do not factor in the money from the EU recovery fund, which should mitigate the decline.
Either way, it is already clear that the consequences of the coronavirus pandemic for Croatia will be severe. CNB experts warned of the consequences in their forecasts.
First of all, the publication points out, there will be a big decline in tourism revenue this year. This decline, as well as the overall decline in economic activities, will result in an increase in unemployment. The survey unemployment rate, which is in accordance with International Labor Organization (ILO) standards and is internationally comparable, could amount to 9.1 percent this year. That is significantly more than last year when the survey unemployment rate amounted to 6.6 percent.
Increase in unemployment and decline in wages
Due to the coronavirus crisis and the government's attempts to help the economy and preserve jobs, the CNB estimates that the budget deficit will amount to 6.8 percent of the GDP this year. There will also be an increase in government borrowing.
On the other hand, a decline in retail lending is expected in 2020, as well as a decline in wages.
"When it comes to wages, a decline is expected, primarily due to wage cuts in the private sector," CNB analysts state.
A decrease in demand caused by the coronavirus crisis and a decrease in oil prices will bring Croatia back to the deflation zone this year, i.e., there will be a decrease in the general price level. CNB forecasts show that we can expect a decrease in the general price level by 0.1 percent this year compared to last year.
Croatia will recover from the coronavirus crisis faster than it did from the last recession
Although the economic decline this year is likely to be more severe than that in 2009, the central bank believes that the recession in Croatia will not last as long as the last one, which lasted for six years – longer than in other European countries. The CNB predicts that recovery will follow as soon as next year, as well as that Croatia's GDP will increase by 6.2 percent in 2021. However, the CNB notes, the growth will not be enough for our economy to quickly return to the state before the coronavirus outbreak. Of course, it should be noted once again that the forecast is subject to change and will depend on the spread of the coronavirus.
Still, if the forecasts of recovery in 2021 come true, which will largely depend on tourism, we can expect the unemployment rate to decline to 7.8 percent next year. The economic recovery will also have a positive effect on the state treasury, so the total budget deficit in 2021 should decrease significantly and amount to 2.4 percent of the GDP.
The demand recovery will also generate price growth. Therefore, the CNB expects an inflation rate of 0.7 percent in 2021.