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Croatia: 1Q GDP, Q GDP down 6.7% y/y

Mon, Jun 29 2009, 11:10 GMT
by Alen Kovac

Erste Bank der oesterreichischen Sparkassen AG

• 1Q GDP contraction somewhat exceeded our expectations, landing at -6.7% y/y and clearly confirming the strong economic downturn. Private consumption recorded a 9.9% y/y decline, which was roughly suggested by retail trade figures and was in line with our expectations. Investment activity met our expectations quite well, declining a robust 12.4% y/y. Overall, 1Q confirmed that domestic demand took a strong hit. Along with that, the main downside surprise compared to our forecast (ESBe 5.5% y/y) came from the stronger than expected destocking, as inventories plunged 40% y/y in 1Q, putting a strong burden on 1Q GDP growth. Public consumption managed to offset part of the pressures, recording a 3.9% y/y increase in 1Q, which was suggested by the 1Q budget figures. Still, maintaining an expansionary fiscal stance in the coming quarters is unlikely, given the budget rebalance and need to tighten the stance and keep the deficit under control. Net exports landed well into positive territory, with exports (-14.2% y/y) clearly outperforming imports (-20.9% y/y) - largely in line with the trade balance figures.
• With 1Q09 GDP underperforming our expectation, risks to our 4.5% y/y forecast increased to some extent. We still expect stabilization in the coming quarters and domestic demand coming under less pronounced pressure, with the 3Q performance heavily dependent on the tourist season. Investment activity should remain burdened by weak and more expensive credit and the poor business environment, while private consumption should also take a hit from slowing credit, accompanied by the deteriorating labor market and continued weak consumer confidence. Net exports’ contribution should remain in positive territory throughout 2009. Hence, we continue to anticipate FY09 GDP contraction landing in the 4.5-5% region, accounting for weaker recessionary pressures towards year-end. However, given the growth structure and high dependence on domestic demand and credit, the potential for recovery in 2010 is rather limited, with risks for another negative GDP growth year increasing.

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Published on  Mon, Jun 29 2009, 11:12 GMT