This report reviews key macroeconomic data and microeconomic developments for Croatia published between April 5 and May 6, 2014.

This was another difficult month for Croatia with both the IMF and the EC downgrading their 2014 growth forecasts for the country and predicting the economic contraction will continue this year as well. The main reason is the new wave of austerity, which comes with the second revision of this year’s budget as the EC urged the government to further reduce the fiscal imbalances.

As part of the second revision, the government also admits the economy might stagnate this year as an impact of the additional budget consolidation measures, equivalent to 0.4%/GDP. The central bank governor said he expects the GDP to drop in 2014.

On top of this, PM Zoran Milanovic sacked in early May his finance minister Slavko Linic over his participation in a land overvaluation deal that reportedly damaged the state budget by EUR 3.6mn. Linic was immediately replaced by his deputy Boris Lalovac and the rotation is not expected to affect the cabinet’s fiscal and financial policy.

The central bank, on the other hand, released a report stating the GDP might have dropped in annual comparison in the first quarter of 2014, even if somewhat rising on the quarter.

The report also contains details on a planned Eurobond issue of around EUR 1bn and provides the names of the four international banks selected to arrange the sale.
On the financial front, Fitch affirmed the ratings of Zagrebacka Banka and Privredna Banka Zagreb, while Hungary’s OTP completed the acquisition of Banco Popolare Croatia.

The report also provides information on the state-guaranteed loan for railway firm HZ Cargo, on the postponement of the talks between the Croatian government and Hungary’s MOL on the management of INA and on the potential investors in the new 500 MW Plomin-C thermal power plant. It also details the conditions put by the competition agency to retailer Agrokor for the completion of the acquisition of Slovenia’s Mercator.

Key points:

• CPI dropped by 0.4% year on year in March following a 0.6% year on year decrease in February 2014. The central bank said it sees the average inflation slowing to 0.2% this year from 2.2% in 2013.

• The working-day adjusted industrial output recovered in January-March (up 1.5% year on year) after contracting in the prior nine months in a row on an annual level. It rose by 0.7% year on year in March, building up on the 1.6% year on year increase a month earlier.

• The unemployment rate registered its first monthly drop since August 2013, sliding to 22.3% in March from 22.7% in February and 22.4% in January. However, it was still above the end-2013’s 21.6%. The average net monthly wage continued to recover in January, edging up by a real 0.2% year on year, after increasing 0.3% year on year in January.