HR Macro Outlook: GDP growth, rating agencies and bond market delivering positive news
The 1Q19 GDP data came in strong at 3.9% y/y, reflecting solid domestic demand, especially surging investments. Consequently, we revised our 2019 GDP forecast to 2.7%. Looking ahead, domestic demand should remain the backbone of the growth momentum, with private consumption keeping its vivid momentum, while investments maintaining their momentum from 1Q19 would imply additional upside risk to our current GDP forecast. Net exports should remain well in negative territory, due to the more challenging external environment and domestic demand-boosted imports. The gloomy external demand outlook remains the most pronounced downside risk in the near term.
The comfortable inflation outlook, steady FX outlook and renewed dovish ECB tones continue to favor the ongoing lax monetary policy stance. Rating agencies delivered on our expectations of an IG rating early in 2019, as both S&P and Fitch upgraded Croatia to ‘BBB-‘. The fiscal outlook remains diligent to support euro adoption and rating prospects going forward. We continue to see ERM II membership as a baseline for 2020. The bond market delivered an impressive performance YTD, with yield compression of approx. 100bp on the long end of the HRK curve and even more in terms of the EUR counterpart. The recent 10Y EUR 1.5bn placement fits well into the picture, being priced historically low at 1.32%. Supportive local factors and the global yield environment continue to favor some additional yield and spread compression.