CNB Council: 5.5% real GDP growth in 2022

Published: 13/7/2022

At its session today, the CNB Council discussed current economic and financial developments and examined the most recent developments in the banking system, recent macroeconomic developments and outlook as well as monetary policy projections. The Council also enacted several other decisions on matters falling within its competence.

The strong growth of the prices of energy and raw materials as well as further supply chain disruptions resulting from the Russian invasion of Ukraine have not adversely affected the prospects for growth of the Croatian economy. Thus the growth of domestic economic activity in the first quarter of 2022 accelerated to 2.7% from the previous quarter and, according to the available high-frequency indicators, it is expected to continue with a similar intensity in the second quarter. In addition to favourable expectations from the peak tourist season, real GDP will increase by 5.5% at the level of the whole of 2022. Unfavourable global circumstances might reflect more on the domestic economy in 2023 when real activity is expected to decelerate to 2.5%. Although short-term expectations are more favourable than in the previous projection, negative risks prevail, in particular in the case of a prolonged duration and further escalation of the geopolitical instability jeopardising the gas supply in Europe, which would then also spill over to the domestic economy through weaker foreign demand, additional strengthening of inflationary pressures and prolonged uncertainty.

As a result of noticeably higher global prices of energy and raw materials, in particular food products, accompanied by an increasingly more evident spill-over of growing input costs on the prices of a broader set of goods and services, domestic consumer price inflation might accelerate significantly (to 9.4%) in 2022. The forecast concerning the growth of inflation in 2023 indicates a deceleration to 4.6%.  However, such a projection implies, among other things, first a stabilisation and then, towards the end of 2022, a gradual fall in the prices of energy and other raw materials on the global market. If global prices remain high for a longer period of time or if domestic inflationary pressures strengthen, in particular because of a more pronounced growth of wages, domestic inflation might also be higher than projected. 

The surplus in the current and capital account might decrease slightly (to 5.2% of GDP) in 2022, mostly due to the negative impact of the rising import prices on the trade in goods balance, which will partly be offset by the increase in the net exports of services, in particular of tourist services, and a more intensive use of EU funds. In 2023, the surplus might decrease even further (to 3.8% of GDP) if a further increase in the trade of goods deficit is accompanied by a slowdown in the increase in the net exports of services and a stronger increase in interest expenses relative to the current year.

The expected stronger change in monetary policies, in addition to rising inflation, has spurred the tightening of global financing conditions. At the same time, the exchange rate of the kuna against the euro held steady as the participation in the Exchange Rate Mechanism (ERM II) helped anchor market expectations and overcome short-term pressures on the exchange rate at the peak of the Russian invasion of Ukraine. Domestic monetary system liquidity remained very high, which helped maintain favourable costs of corporate and household financing. The growth of corporate placements accelerated noticeably, and household lending continued to strengthen moderately. In the forthcoming period, monetary policy will be gradually adjusting to the instruments and the course of action of the monetary policy of the euro area, which will result in a considerable easing of monetary conditions and to a certain extent offset the expected impact of the tightening of foreign financing conditions on the domestic economy.

Despite the continued growth of short-term vulnerabilities in the non-financial sector, yesterday’s confirmation of Croatia’s joining the euro area reduced the structural vulnerabilities in the financial system, so that the total exposure of the financial system to systemic risks decreased slightly at the end of the second quarter of 2022 and it is assessed as moderate. Although in the first quarter of 2022 domestic economic growth was relatively strong under the effect of the recovery of service activities from the pandemic, negative risks in the non-financial sector might remain significant in the forthcoming period, mostly as a result of high inflation, the slowdown in the global economic growth and the increase in the prices of energy and raw materials in the presence of supply chain bottlenecks. Furthermore, the change in the monetary policy direction of the central banks of the largest economic areas and the resulting tightening of global financing conditions have already pushed up yields on government bonds and could also result in the increase of corporate and household financing costs. 

High short-term risks in the non-financial sector are also due to the acceleration of real estate prices, which, coupled with an uncertain economic outlook and potential growth of household debt servicing burden amid tightened financing conditions and a drop in real income, strengthens the risk of turnover in the real estate market. Short-term risks in the non-financial sector have been partially mitigated by continued good results of the corporate sector. However, favourable trends are not equally distributed across activities.

In contrast with the risks from the macroeconomic environment, the recovery of profitability and continued favourable developments of other key indicators of the operations and resilience of credit institutions, coupled with a decrease in the share of non-performing loans, have reduced short-term risks in the financial sector. In addition, in view of the EU Council’s Decision on the adoption by Croatia of the euro on 1 January 2023, adopted yesterday, the structural vulnerabilities of the financial and non-financial sectors resulting from currency and currency-induced credit risk have been reduced. The continuation of the euro introduction process may be expected to bring about additional favourable effects that will mitigate the financing cost growth, although these effects have already been partly included in the existing financing conditions for the domestic non-financial sector.

There was no need for the adjustment of CNB’s macroprudential policy measures in the second quarter of 2022. Specifically, due to rising cyclical vulnerabilities, the countercyclical buffer rate was increased at the beginning of the year, so that the currently announced level of 0.5% is assessed as appropriate. The CNB continues to monitor trends in cyclical risks in order to be able to further adjust its macroprudential instruments if necessary.

The CNB Council adopted the Decision on amendments to the Decision on reserve requirements and the CNB Governor adopted the Decision on amendments to the Decision on the minimum required amount of foreign currency claims, Decision on reporting on money market and the Decision on reporting on the market in foreign means of payment. 

These decisions were adopted within the preparations for the introduction of the euro on 1 January 2023. The Decision on amendments to the Decision on reserve requirements prescribes the lowering of the reserve requirement calculation rate from 9% to 5% as of 10 August 2022 and its lowering from 5% to 1% as of 14 December 2022 as well as switching to 100% reserve requirement maintenance on accounts in the CLVSP for the kuna component of reserve requirements, i.e., for the foreign exchange component on accounts in TARGET. The total decrease in reserve requirements will amount to HRK 34.2bn.

The Decision on amendments to the Decision on the minimum required amount of foreign currency claims introduces a gradual revocation of the maintenance of foreign currency liabilities by foreign currency claims in two phases: as of August 2022 the minimum maintenance percentage is reduced from 17% to 8.5% and as of December 2022 the obligation is revoked. The revocation of this decision will enable banks to freely use a part of foreign assets in the amount  of approximately EUR 5bn.

The new Decision on reporting on money market and Decision on reporting on the market in foreign means of payment, which come into force on the euro introduction day, have been amended in accordance with the new circumstances. 

The CNB Council extended its approval to the Supervisory Board of OTP banka d.d. to appoint  Nikola Mikša as Member of the Management Board of the bank. The approval was also given to the Supervisory Board of KentBank d.d. for appointing Nikolina Cvitanović as Member of the Management Board of the bank and to the Supervisory Board of Privredna banka Zagreb d.d. for appointing Hrvoje Dajak as Member of the Management Board of the same bank.

The Council also approved the Croatian Mint report for 2021 and adopted the Decision on the main features and releasing into circulation of the 25 kuna commemorative circulation coin Pelješki most, 2022.