CNB Council: 6.8% GDP growth in 2021

Published: 14/7/2021

At its session today, the CNB Council discussed current economic and financial developments and examined the latest 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.

Relatively favourable current economic developments, coupled with the maintained assumption of the recovery in tourist activity, resulted in an increase in the CNB’s real GDP growth projection in 2021 to 6.8%. Personal consumption should recover in 2021, driven by a further easing of epidemiological measures, the rise in employment and wages, as reflected in the improvement of consumer confidence and a gradual recovery of consumer lending.

The acceleration of works on the reconstruction of the areas hit by the earthquake and the use of funds from the EU recovery facility should provide considerable support to the increase in investments. These investments will offset the smaller inflow of funds from the previous financial perspective (2014 – 2020). Economic growth projections are also exposed to significant negative risks due to uncertainties regarding the course of the pandemic and its potential impacts.

The expected keeping of the prices of energy (in particular of refined petroleum products) at a high level reached in the first half of the year will have an impact on the acceleration of the average annual consumer price inflation rate to 1.7% in 2021. Despite a fast growth in domestic demand, inflation might slow down moderately in the coming year to 1.5%, under the assumption of stable prices of energy and raw materials.

The surplus in the current and capital account in 2021 might increase noticeably, primarily due to the expected recovery in tourism revenues and a further intensified withdrawal of EU funds. All of the above should slightly increase the surplus in the current and capital account in 2022. Accordingly, the trend of improvement of the relative indicators of external debt is expected to continue.

The CNB continued its expansionary monetary policy in the first half of 2021. Banks’ free reserves thus reached a record high in June, which contributed to the decrease in financing costs and keeping most interest rates at historical lows. In parallel with the economic recovery, the lending revival was also noticeable, so that credit institutions' corporate placements increased slightly in the first five months of 2021, while household placements increased significantly, mostly in housing loans. The central bank will continue to support the stability of the exchange rate and prices and continue to use its instruments to maintain favourable domestic financing conditions.

Total exposure to systemic risks in the second quarter of 2021 remained high. There was a decrease in short-term risks in the non-financial sector, driven by optimism associated with the anticipated containment of the pandemic and a faster economic recovery. However, there is still high uncertainty regarding the threats from the surge of new virus variants and a potential ineffectiveness of the vaccine, or a slower vaccination rollout, which may lead to the emergence of new pandemic waves and, consequently, to more restrictive epidemiological measures. This is the reason for the still elevated risks in the government, non-financial, private and financial sectors. Elevated risks in the real estate market are associated with the increase in prices and pushing them further away from fundamentals.

Credit institutions’ liquidity and capitalisation are still high, and profitability recovered slightly in the beginning of 2021. The favourable regulatory treatment of the moratoria and other forms of loan restructuring after the outbreak of the pandemic offset the materialisation of credit risk. Although a large number of granted moratoria already expired in the first quarter of 2021, the share of non-performing loans in total loans (stage 3) is still not increasing. Nevertheless, banks still estimate that credit risk is at an elevated level, as shown by the increase in the share of loans in stage 2.

At the end of the first quarter of 2021, credit institutions reported HRK 1.1bn in profits, an increase of HRK 8.9m or up by 0.8% than in the first three months of 2020. Profitability indicators declined slightly from the first quarter of the previous year due to the impact of the growth in assets and capital. Return on assets (ROA) fell from 1.0% to 0.9%, and return on equity (ROE) dropped from 7.1% to 6.8%, although their values were higher than at the end of 2020. 

System liquidity increased additionally under the effect of the rise in highly liquid assets and the key capitalisation indicators remained at very high levels – the total capital rate of the banking system stood at 25.1%.

The CNB Council granted its approval to the Supervisory Board of Samoborska banka d.d. to appoint Marijan Kantolić as President of the Management Board of Samoborska banka d.d. and Verica Ljubičić as Member of the Management Board of Samoborska banka d.d. Finally, the Council also reviewed the Report of the Croatian Monetary Institute for 2020.