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EU11 Regular Economic Report. Macroeconomic Report: Focus on Croatia. Entering the fifth year of recession. Croatia: Quarterly GDP growth, y/y. EU 11 and EU15: GDP growth, y/y. Source: Eurostat, CROSTAT, World Bank staff calculations. Deteriorating Labor Market Conditions.

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EU11 Regular

Economic Report

Macroeconomic Report:

Focus on Croatia

entering the fifth year of recession
Entering the fifth year of recession

Croatia: Quarterly GDP growth, y/y

EU 11 and EU15: GDP growth, y/y

Source: Eurostat, CROSTAT, World Bank staff calculations

deteriorating labor market conditions
Deteriorating Labor Market Conditions

Sour labor market developments, Croatia, in %

Less opportunities (or incentives) even in the informal sector

Source: CROSTAT, World Bank staff calculations

external position slightly improved
External Position Slightly Improved
  • External debt although high, shrank slightly due to bank deleveraging – some 20 pp of GDP above EU11
  • CAD turned positive in Q4 2012 while net FDI inflow improved

CAD and Net FDI (% of GDP)

External Debt (% of GDP)

Source: CNB, CROSTAT, World Bank staff calculations

public debt on rise
Public Debt on Rise
  • Stronger fiscal consolidation required, especially on the expenditure side
  • 2013 plans hardly achievable

Public Debt and Deficit (% of GDP)

Note: Fiscal deficit assessed for 2008-2011 as per the required ESA95 coverage

Source: MOF, CROSTAT, World Bank staff calculations

weak signs of bottoming out
Weak Signs of Bottoming Out?

Tourism recovered to pre-crisis levels, but low impact on trade…

High frequency indicators

Source: CNB, CROSTAT, World Bank staff calculations


Some Softening of the Labor Market

Source: CROSTAT, HZZ, World Bank staff calculations


However, Structural Problems Deepened

Job destruction in industry continued; public sector employment dominated

Labor market entry for youth particularly constrained

Source: CROSTAT, HZZ, World Bank staff calculations

reform agenda seizing opportunities
Reform agenda – seizing opportunities
  • 84th in the World Bank’s Doing Business rankings or 81st on the Global Competitiveness rankings
  • Challenging competition after July 1 with many of the world’s best nations for doing business.
what to do fiscal consolidation
What To Do – Fiscal Consolidation
  • Need to regain the investment credit rating before the capital market deteriorates (again)
    • Interest payments at 3% of GDP already at the capital spending level
    • Expenditure-based consolidation remains a priority – public spending at around 45% of GDP as opposed to 40% of GDP of EU10
    • Fiscal space exists in the area of the wage bill, subsidies and consumption
    • Social spending requires redistribution from categorical to targeted social programs and a separation from contribution-based benefits from categorical benefits
    • Capital spending needs to be EU-funded and to take into consideration future maintenance cost
what to do investment climate
What To Do – Investment Climate
  • Strengthen the business environment in the areas of: insolvency proceedings; issuance of construction permits; registering property; and transparency of related-party transactions.
  • Open up the network industries such as energy, railways, postal services and telecoms to competition to deliver better services at better prices for business and citizens.
  • Deepen the governance reform in the areas of: e-governance, performance-based public sector pay; territorial reorganization; review business necessity of quasi-fiscal institutions

Source: World Bank



what to do labor market and social sectors
What To Do – Labor Market and Social Sectors
  • Demand and supply side issues, no quick wins:
    • EPL still highly rigid in stimulating employment and accelerating restructuring
    • Skill mismatches
    • Low labor participation
    • Which reforms:
      • Increasing hiring flexibility (a good set of proposals submitted by the government)
      • Reducing rigidity of collective firing
      • Improving VET education and providing incentives for LLL
      • Reducing incentives for early retirement, consolidating social benefits and improving their targeting
what to do eu funds
What To Do - EU Funds
  • July 1, 2013 Croatia Becomes 28th EU Member State
  • EU Structural Funds:
    • 1.2% of GDP available for absorption in 2013 or 0.8% of GDP in payments.
    • Around 3.5% of GDP per year over the next programming period in commitments
    • Ease the external balance position and improve debt sustainability
  • What needs to be done?
    • Create fiscal space in the order of 1 percent of GDP per year as counterpart funds and for pre-financing
    • Develop sector and regional development strategies linked to sustainable fiscal frameworks