COVID and Economic Update Croatia: The Spring of Hope

COVID-19 development: Stricter measures were introduced late due to the potential negative impact on the whole economy and the state budget and, therefore, Croatia showed the lowest Oxford stringency index in the autumn months. However, the pressure on the health care system resulted in renewed restrictions on restaurants, borders and schools.
Growth outlook: Even though there was a growth in Q3 of +6.9% qoq compared to Q2, the real GDP fell by 10% yoy, showing that the tourism-based model is too risky and fragile. Except for construction and IT the other relevant industries show an overall negative trend in Q4 leading to an estimated growth of -9.4% yoy in 2020. Still, a growth of about 5% yoy is expected in 2021.
Fiscal policy: The public debt to GDP ratio jumped to its historical high and in just one fiscal year melted all the efforts of previous three years of fiscal consolidation. Nevertheless, the budget plan for 2021-2022 seems realistic although it relies on EU funds and NGEU.
Monetary policy: The ERM2 entry and the aspiration to accept the euro as soon as possible certainly had a positive impact on the state risk premium but until then the exchange rate stability remains the main anchor of monetary policy.