Croatian Economic Growth Slowed to 6.6% on Spending

Sep 28, 2007 - Croatian economic growth slowed in the second quarter as consumers and the government curbed spending.

Gross domestic product rose an annual 6.6 percent in the quarter, the state statistical office said on its Web site today, exceeding a median estimate of 6 percent by four economists in a Bloomberg survey. The economy grew 7 percent in the first quarter, the fastest growth in more than four years.

"We expect a certain slowdown of economic activity's growth in the second half of the year," Zdeslav Santic, economist at Raiffeisenbank Austria d.d. Zagreb said in an e- mailed report. "However, the GDP growth for the whole of 2007 should be visibly higher than in the year before and we don't expect it to be lower than 5.5 percent."

Lower economic expansion, combined with rising inflation pressures and slower wage growth, may dampen chances for boosting living standards in the country with purchasing power of 55 percent of the European Union average.

The former Yugoslav republic, which was devastated by the Balkan civil wars of the 1990s, is ahead of Ukraine, Serbia and Turkey in negotiations to join the EU and the Adriatic Sea state aims to become a member in this decade.

Construction, Investment

Capital investments dropped to 5.8 percent in the second quarter of the year from 11.2 percent in the first, the office said. Construction grew 2.5 percent in the second three months of the year annually, compared with 7.6 percent in the first.

"Construction works are a significant part of capital investments, so their slowing contributed to a drop in investment, which had the slowest growth rate in two years," Santic said.

Personal spending growth slowed to 6.5 percent from 7.1 percent in the previous quarter and government spending to 2.7 percent from 2.8 percent in the period, it said.

Industrial output grew 7.1 percent on average in the second quarter, according to Bloomberg calculations, from 8 percent in the first three months, and slid to a 14-month-low of 2.8 percent in August.

Manufacturing Imports

Electrical equipment makers Ericsson Nikola Tesla and Koncar Elektroindustrija d.d., which had a 43 percent net income growth in the first half of the year, needed to import manufacturing goods for production, increasing the trade deficit to 36 billion kuna in the first six months of the year, up 10.4 percent from the same period in 2006.

The trade gap is the main contributor to the increase in the current-account deficit, which amounted to 2.04 billion euros in the first three months of 2007. The central bank will report the second quarter balance of payment details later today.

Retail sales growth slowed to 5.8 percent annually in the second three-month period from 7.7 percent in the first three months of the year. Average net wages were 2.8 percent higher in the period from 3.6 percent in the first quarter and gross wages grew 3.6 percent in the second quarter compared with 4.5 percent in the previous three months.

``We expect growth to slow in 2008 given a post election more neutral fiscal stance, fading of recent unsupportable retail dynamics and high import dependency of the economy,'' Hypo Group Alpe Adria bank said in a market report. It forecasts growth of 5.9 percent for 2007 and 5.2 percent in 2008.

Croatia, which is having parliamentary elections in November, had external debt of 30.4 billion euros in August, carried mainly by companies and corporate banks taking loans abroad to meet demand. The government in 2004 started borrowing money domestically and reduced its contribution in the foreign debt.

The economy grew 1.2 percent from the previous quarter, the office said. Growth was 4.8 percent in all of 2006.