Croatia is experiencing a contraction of GDP of 7.8% in the first half of 2020

Following the coronavirus pandemic and earthquakes that hit the country, real GDP in the first half of 2020 shrank by 7.8% year-on-year, reflecting a decline in personal consumption, investment and exports. Meanwhile, government spending increased in fractions, Croatian Central Bank (HNB) Governor Boris Vujčić said on Thursday.

Vujcic broke new ground in Parliament as he presented the Croatian National Bank (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 the coronavirus and the introduction of restrictions. He added that the decline in real GDP in developed countries was most pronounced during the peak of the spring pandemic wave.

Personal consumption shrank by 6.8% per year, reflecting a decline in disposable income due to negative trends in the labor market and a decline in consumption of services that limited their functioning due to epidemiological constraints. Moreover, a changing attitude among citizens saw them spend less, due to the problems raised by social distancing, but also the deterioration of consumer optimism. These trends were also reflected in the lower debt of the population, Vujči said.

The annual inflation rate slowed from 1.4% in December 2019 to -0.2% in June 2020 under the influence of lower prices of petroleum products, caused by the decline in global demand. The spread of the pandemic led to a decrease in inflationary pressure in general, especially in tourism-related services due to a significant decrease in the number of passengers and in sustainable consumer goods due to a decrease in investment. Core inflation stagnated slightly from 1.2% in December 2019 to 1.1% in June 2020, mainly as a result of a decline in annual rates for individual food products and catering and accommodation services.

The contraction of economic activity due to the pandemic resulted in declining imports of goods at a significantly higher 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 negatively affected by a significant decline in net exports of services, especially due to the situation in tourism.

HNB immediately adjusted its monetary policies, using all available measures in order to maintain exchange rate stability and favorable conditions to finance citizens, the corporate sector and the state, Vujčić said. HNB sold a bank totaling 2.7 billion euros, after which the kuna exchange rate stabilized, he added.

Due to the above and other measures, kuna liquidity reached record levels and the public and private sectors were able to continue lending to domestic banks on virtually the same terms as before the crisis. However, anemic economic activity and credit demand resulted in tighter lending conditions, as a result of which consumer credit slowed.

The budget deficit of HRK 13.2 billion in the first half of 2020 reflects the negative impact of the pandemic crisis on the economy and budget revenues. Interim measures created to mitigate the effects of the pandemic, such as tax waivers and job support support measures, also contributed to declining incomes. This is especially evident in the second quarter, when the deficit rose to nearly HRK 10 billion, HNB notes in its report.

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