This report reviews key macroeconomic data and microeconomic developments for Croatia published between August 12 and September 4, 2014.

Croatia’s statistics office released a flash estimate in late August, saying the country’s GDP shrank by 0.8% y/y in the second quarter of 2014, which is a bigger drop than the anticipated 0.6% by local analysts. If confirmed, the second-quarter contraction coupled with the 0.4% y/y drop in the first quarter already puts a downward risk on the full-year projections of the domestic and international institutions, which all see a drop of no more than 1% in 2014.

Given the significance of the tourism sector for the Croatian economy, the third-quarter data on tourist arrivals and revenue, and on their effect on the current account and GDP, will be crucial for the size of this year’s contraction. The finance ministry already hinted that depending on the results of the tourism season, hit by the bad weather in July, the government might have to revise its budget for a second time in September.

Concerning the other sectors of the economy, scarce public and private investments and subdued domestic consumption continue to weigh on the overall growth prospects. Still, the industrial production rose by 1.4% y/y in July, reversing the 1.7% y/y drop in the previous month, and supporting the 0.8% y/y increase in January-July. The growth is lead by the manufacturing industry, which builds up the hopes that Croatia’s exports this year will increase modestly, helping the overall industrial output gain some ground.

The report provides details on Croatia’s worsening position in a global competitiveness ranking, on S&P affirming its credit rating on the capital Zagreb, and on Fitch downgrading the Croatian arm of UniCredit Group.

The report also contains information about a tender for a EUR 500mn hydropower project, and announces who is the best bidder in the 500 MW Plomin-C thermal power project. It also speaks about the government’s hopes to award motorway concessions by February 2015, and as usual about the latest events in the INA-MOL case and the Agrokor-Mercator deal - the latter of which has been successfully wrapped up, something that cannot be said for the former.

Key points:

• CPI inched down 0.1% y/y in July following a 0.4% y/y decrease in June 2014. Retail sales fell 2% y/y in July, which is a serious worsening compared to the 0.1% y/y drop in June and the 1.8% y/y increase in May.

• The bad loans share in Croatia rose to 16.59% at end-June from 16.11% at end-March. It was also up by 1.48pps in annual terms. The total value of bad loans also rose - by 7.3% y/y and by 1.3% q/q at end-June. Still, the banking sector’s pre-tax profit saw a 22.6% y/y increase to EUR 206mn in the first half of 2014.

• The unemployment rate continued to decline in monthly terms in July to 17.8% from 18.3% in June, 19.66% in May and 21.1% in April. The reason for the drop might be the seasonal employment related to the needs of the tourism sector. The average net monthly wage rose by a real 1.7% y/y in June after falling by 1.3% y/y in May.