Croatia suffers 7,8% GDP contraction in first half of 2020

Croatia suffers 7,8% GDP contraction in first half of 2020

In the aftermath of the coronavirus pandemic and the earthquakes that struck the country, real GDP in the first half of 2020 contracted by 7.8% year-on-year, reflecting a drop in personal consumption, investments and exports. Meanwhile, government expenditure rose fractionally, said on Thursday Central Bank of Croatia (HNB) Governor Boris Vujčić.

Vujčić broke the new in Parliament while presenting the Croatian National Bank’s (HNB) annual report on the financial situation and price and monetary policy stability in the first half of 2020.

He recalled that, in Q1 and Q2 2020, a strong contraction of the global economy was recorded due to the spread of coronavirus and the introduction of restrictions. He added that the fall in real GDP in developed countries was the most pronounced during the peak of the spring pandemic wave.

Personal consumption shrank by 6.8% YoY, reflecting a decrease in available income due to negative trends on the labour market and a fall in the consumption of services which limited their operations due to epidemiological restrictions. Furthermore, a changing attitude among citizens saw them spending less, due to problems raised by social distancing, but also the deterioration of consumer optimism. Those trends were also reflected in the lower indebtedness of the population, said Vujčić.

The annual inflation rate slowed down from 1.4% in December 2019 to -0.2% in June 2020 under the impact of the decreased prices of oil products, caused by the fall in global demand. The spread of the pandemic led to a decrease in inflationary pressure overall, notably in services related to tourism due to a significant drop in the number of passengers, and in durable consumer goods due to a drop in investments. Basic inflation mildly stagnated from 1.2% in December 2019 to 1.1% in June 2020, primarily as a result of a drop in annual rates for individual food products and catering and accommodation services.

The contraction of economic activity due to the pandemic resulted in the import of goods falling at a significantly greater rate than exports, with the deficit in current and capital accounts shrinking in the first half of 2020 compared to the same period in 2019. On the other hand, current and capital accounts were adversely affected by a significant drop in the net export of services, notably due to the situation in tourism.

HNB promptly adapted its monetary policies, using all available measures with the aim of preserving stability in the exchange rate and favorable conditions to finance citizens, the corporate sector and the state, said Vujčić. HNB sold a total of €2.7 billion to banks after which the kuna exchange rate was stabilized, he added.

Owing to the above and other measures, kuna liquidity reached record levels and the state and private sector were able to continue taking loans with domestic banks virtually under the same terms as before the crisis. However, the anaemic economic activity and demand for loans resulted in stricter terms to approve loans as a result of which consumer lending slowed down.

The budget deficit of HRK 13.2 billion in the first half of 2020 reflects the negative impact of the crisis caused by the pandemic on the economy and budget revenue. Provisional measures designed to mitigate the consequences of the pandemic, such as waiving tax obligations and job-keeping support measures, also contributed to the fall in revenue. This is particularly obvious in the second quarter, when the deficit climbed to almost HRK 10 billion, the HNB notes in its report. /ibna