Drifting towards stagnation in 2023
GDP figures confirmed solid and broad-based growth in 3Q (+5.2% y/y), with both domestic and external demand remaining supportive. Looking ahead, we expect further growth moderation in 4Q22 and a move towards stagnation/technical recession in 1H23, as inflation puts a further drag on consumption, private investments take a hit from uncertainty/rising rates, and external demand is hampered by slowing EU growth. Following the tangible revision of the 1H GDP figures, the FY22 GDP call received a 0.5pp upgrade to 6.0%, while for 2023, we see growth moderating to 0.5-1.0%, with risks tilted to the downside.
As inflation hit 13.2% y/y in October 2022, our baseline is that we are close to the peak and hopefully some normalization of supply-side pressures and weaker demand would see the inflation trajectory starting to reverse as we approach mid-2023. The fiscal news flow has been positive, with the 2022 budget gap now aimed at close to 1.5% of GDP and the outlook for 2023 suggesting a sub-3% of GDP gap as well. The bond market remained volatile, but we saw Croatia trading tighter and gradually converging towards its CEE EA peers, reflecting euro area and rating prospects. On the integration front, we are pending the final green light for Schengen area membership.