HR Macro Outlook, Croatia: GDP outlook affirmed, fiscal outlook looks slightly more challenging
GDP growth shifted into higher gear in 2Q18 and landed at 2.9% y/y. Domestic demand maintained a steady profile (both private consumption and investments), while net exports delivered a much stronger performance, with the contribution turning marginally positive. The CA surplus expectedly deteriorated in 1Q18 (mostly trade balance), but remains comfortable. Inflation accelerated, mostly owing to energy prices, but the monetary policy framework remained unchanged. The fiscal outlook looks under control going into 2018, with the downside risks being predominantly related to uncertainty over shipyard-related guarantees. The news flow from rating agencies remained positive, as Fitch somewhat surprised with an outlook upgrade to ‘positive’, hence further favoring the likelihood of IGR down the road.
With 2Q18 fitting well into our expectations, we affirm our 2018 GDP call at 2.8%, while seeing the risks as balanced. The headline figure should remain supported by ongoing solid private consumption momentum and the still only modest recovery in investments. Following normalization in 2Q, external demand is seen as maintaining a steady role, being seasonally boosted by tourism, although net exports are seen as being in the red in 2018. The inflation outlook was fine-tuned, but remains comfortable and supportive of the lax CNB framework. Correspondingly, we remain bullish as far as LCY yields are concerned. The exchange rate outlook also looks steady. We continue to expect the MoF to deliver at least a balanced fiscal position, excluding the potential one-off related to shipyards.