Information on economic trends

April 2020 CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020 3 Summary

Real economic activity decelerated on an annual basis in January and February 2020 from the end of the previous year. Business and consumer confidence indices fell sharply in March due to the coronavirus pandemic outbreak, and economic indicators could be even worse than these indices suggested given that the survey was carried out in the first half of the month. The annual consumer price inflation rate decreased to 1.5% in February, primarily due to energy prices, most importantly a fall in refined petroleum product prices, which was also recorded in March. Increasing insecurity and growing concerns about the fast spread of the coronavirus pandemic and the strengthening of containment measures resulted in an extremely high volatility in international financial markets in late February and in March 2020. Emerging market countries, including Croatia, saw increased pressures on exchange rates and securities markets. The EUR/HRK exchange rate rose by 2.0% at the end of March from the end of February, and yields to maturity on government bonds and the risk premium increased in the same period. The CNB responded to this situation with a number of measures of monetary policy aimed at preserving the high degree of its accommodativeness, the implementation of them starting in early March. These include five foreign exchange interventions and a smaller volume of outright transactions that the CNB conducted in March, selling to banks a total of EUR 2.5bn. In the same month, the CNB carried out a structural operation, releasing HRK 3.8bn to banks, and reactivated regular weekly operations, releasing a total of HRK 1.85bn. In addition, the reserve requirement rate was reduced from 12% to 9%, with the result that banks’ free reserves with the CNB increased by HRK 6.33bn. In order to maintain stability in the government securities market, the CNB also carried out two fine-tuning operations in March, purchasing the securities of the Republic of Croatia in the total nominal amount of HRK 4.29bn. According to available data, the annual growth of bank placements accelerated to 4.8% in February, due to the faster growth of placements to non-financial corporations, whereas the annual growth of household placements decelerated slightly. As shown by monthly MoF data, the central government budget balance, which showed a slight surplus last year, saw a deficit of HRK 1.3bn in January 2020. The general government debt to GDP ratio, due to the favourable influence of nominal GDP growth, fell from 74.7% of GDP at the end of 2018 to 73.2% of GDP at the end of 2019.

The GDP nowcasting model, based on a small number of avail- 14). Despite slightly accelerated clearings from the records, the fall able high frequency data for January and a part of February, points in unemployment decelerated in early 2020 due to a marked de- to a slowdown in the annual growth of real activity in the first quar- crease in new employment. The continued fall in the number of un- ter of 2020. This forecast is likely to be revised downwards once ad- employed persons brought down the registered unemployment rate ditional data are included (Figure 1). In January and February 2020 to 6.9% from 7.2% in the fourth quarter of 2019 (Figure 15). The industrial production remained at its average level from the previous Labour Force Survey data for the fourth quarter of 2019 show that quarter. Production increased in all main industrial groupings except the ILO unemployment rate held steady at 6.5%. in energy, with the highest increase recorded in the production of Data on wages paid in February 2020 were reported on the basis capital goods (Figures 3 and 4). Real retail trade turnover deceler- of a changed methodology (Figure 16).1 The shift in methodology ated slightly by 0.2% in February from January 2020, growing at resulted in an increase in the level of average nominal gross and net a quarterly rate of 3.5% (Figure 7). Due to a significant increase in wages, making them incomparable with data on wages previously works done on buildings and civil engineering works, total construc- released. In contrast, the average gross wage paid in February 2020 tion activity grew by 3.1% in January 2020 from the previous quar- as reported according to the old methodology remained almost un- ter average (Figures 5 and 6). changed (0.2%) from January. The CBS also released data on non- The results of the Consumer Confidence Survey for March show taxable allowances, taking into account the increase in employers’ that consumer confidence deteriorated notably on a monthly basis, payments following the introduction of new forms of these allow- which was a reaction to the coronavirus pandemic. It should be point- ances, which was unaccounted for by the former wage statistics.2 ed out that surveys are carried out in the first two weeks of a month The tax reform led to a considerable increase in the average non-tax- and that containment measures were tightened considerably after this able allowance paid per employee in 2018 and 2019 (HRK 388 and one was completed. Expectations worsened in all components of the HRK 548 respectively compared with HRK 292 in 2017) and, con- index, with the highest decline recorded in expectations about the sequently, in disposable employee income. Specifically, the annual general economic situation in Croatia and the financial situation of growth of the average net wage increased by the amount of non-tax- households in twelve months from now. The business confidence in- able allowance was 5.6% and 5.7% in 2018 and 2019 respectively, dex also decreased sharply in March. The decrease was recorded in whereas the realised wage growth was 4.3% and 5.3% respectively. all activities, but it was especially high in services, with the result that Consumer prices fell by 0.3% in February from the previous expectations also deteriorated on a quarterly basis (Figure 8). month (Table 1), primarily as a result of a decrease in refined petro- Employment growth decelerated to 0.4% in January and Febru- leum product prices in February brought about by a drop in global ary 2020 from 0.6% in the fourth quarter of 2019. The number of crude oil prices. The Brent crude oil price fell from USD 64 per bar- employed persons increased the most in construction, information rel in January to USD 55 in February due to the spread of the coro- technology and business services, falling slightly in industry (Figure navirus and uncertainty surrounding global economic activity.3 The

1 On 20 March 2020, the Croatian Bureau of Statistics released data on wages paid in February for January 2020 according to a changed methodology, without having revised these data backwards. The average wage paid in February 2020 was reported according to the full-time equivalent principle, in contrast with the previous periods, when average wages were calculated by dividing total disbursements by the number of employees who received these disbursements, excluding all those who worked fewer than 80 hours per month. 2 In the last round of tax burden reduction, the Government of the Republic of Croatia introduced new forms of non-taxable receipts, including, as of December 2018, a new category of performance bonuses (up to HRK 5 000 per annum) and, as of 1 September 2019, new categories of food, accommodation and kinder- garten allowances as well as Cro Card. 3 Oil prices continued to drop in March, averaging USD 34 per barrel. 4 CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020 annual growth of consumer price inflation slowed down from 2.0% HRK 3.8bn for a term of five years, at an interest rate of 0.25%, in January to 1.5% in February (Figure 18). The main contribution to the largest amount ever released through structural operations. Af- the slowdown came from energy (primarily refined petroleum prod- ter the auction, banks repaid before maturity about HRK 1.3bn of ucts) and from vegetables, to a somewhat lesser extent. The decrease funds released through previous structural operations. On the same in the annual rate of change in the prices of vegetables can be partly day when the structural operation was conducted, the CNB started attributed to a fall in these prices in February probably due to fa- to carry out regular weekly operations, releasing to banks a total of vourable weather conditions and partly also to the base effect re- HRK 1.85bn, at an interest rate of 0.3% on the first auction and at a sulting from their growth in February 2019. In contrast, the annual rate of 0.05% on the following two auctions. In order to release ad- rate of core inflation accelerated by 0.1 percentage point, increasing ditional liquidity, the CNB also adopted the Decision amending the from 1.4% in January to 1.5% in February, primarily reflecting the Decision on reserve requirements, by which it reduced the reserve acceleration of the annual growth rate of prices of clothing and foot- requirement rate from 12% to 9%, thus lowering the overall amount wear, meat and milk. The annual growth rate of domestic producer of reserve requirements by about HRK 10.45bn, that is, by HRK prices (excluding energy) decelerated slightly from 0.4% in January 9.05bn in the kuna component and by HRK 1.40bn in the foreign to 0.3% in February. exchange component of reserve requirements. The allocated reserve The current and capital account of the balance of payments re- requirements of banks, that is, the reserve requirement amount held corded a deficit of EUR 0.3bn in the last quarter of 2019, which is in a special account with the CNB, decreased by HRK 6.33bn. In an a marked improvement from the EUR 0.6bn recorded in the same effort to maintain stability in the government securities market, the period in 2018 (Figure 57). These favourable developments were CNB started purchasing the government bonds of the Republic of primarily driven by the further growth of net exports of services, Croatia. Through two fine-tuning operations carried out in March, spurred by the strong growth of income from tourism. Another posi- the central bank purchased the securities of the Republic of Croatia tive contribution came from the growth of surplus in the secondary in the total nominal amount of HRK 4.29bn. These operations alle- income account and the capital transactions account, deriving main- viated the effect caused by the withdrawal of kuna liquidity through ly from the growth of total net income from transactions with the EU foreign exchange interventions, with the result that excess liquidity budget. Foreign trade in goods decelerated noticeably so that its def- in the domestic banking market amounted to HRK 32.2bn in early icit edged up. The deceleration was especially evident in goods im- April (Figure 54), while the overnight interest rate on interbank de- ports, which grew at an annual rate of 1.5% (compared with 12.7% mand deposit trading continued to drop in March down to 0.00%. in the previous year), whereas exports went up 1.0% (compared with The implied interest rate on interbank trading in foreign exchange 2.2% in the previous year). The primary account balance also dete- swaps and the interest rate on banks’ repo operations remained in riorated due to higher expenditures on direct equity investments, that negative territory in March (Figure 27), while the interest rate on is, the growth of profit of domestic banks and non-financial corpora- one-year kuna T-bills without a currency clause held steady at 0.06% tions in foreign ownership. On the 2019 level, the current and capital in the same period (Figure 28). However, as regards financing con- account surplus was 5.0% of GDP, as against 3.3% of GDP in 2018. ditions in the domestic market, it should be noted that at the last Depreciation pressures on the kuna to exchange rate in- auction of T-bills, held on 24 March, the amount released was lower creased sharply in late February and in March due to foreign ex- than the planned issue amount; also noteworthy was a sharp increase change demand rising amid growing uncertainty and mounting in yields to maturity on government bonds. concerns about the adverse effects of the coronavirus pandemic Bank interest rates on new corporate and household loans mostly on domestic economic developments. With the aim of alleviating decreased or stagnated in February 2020 (Figures 28 and 29). Inter- downward pressures on the domestic currency and maintaining the est rates on kuna investment loans indexed to foreign currency, a stability of the exchange rate, the CNB conducted five foreign ex- category of original new corporate loans, recorded a marked decline change interventions in the period from 9 to 31 March, selling to (Figure 31). Interest rates on original new housing and consumer banks a total of EUR 2 243.55m. In addition, in the period from 19 loans to households went down (Figures 32 and 33), with consumer to 30 March, the CNB conducted seven outright foreign exchange financing costs down to a historical low. Interest rates on corporate sales outside auctions, selling to banks a total of EUR 282.0m. The time deposits decreased in February, while those on household de- end-March exchange rate was EUR/HRK 7.61, which is an increase posits remained almost unchanged from the previous month (Fig- of 2.0% from EUR/HRK 7.46 at the end of February (Figure 21). ures 34 and 35). The spread between interest rates on total new loans The nominal effective exchange rate of the kuna was 1.1% higher and deposits edged up to 5.02 percentage points in February, while at the end of March than at the end of February 2020, primarily as a the spread between interest rates on loans and deposits remained at result of the weakening of the kuna versus the euro and to a smaller 4.20 percentage points (Figure 37). degree due to its weakening against the US dollar, reflecting the dol- Net domestic assets (NDA) of the monetary system increased in lar’s strengthening versus the euro in the world’s foreign exchange February 2020, whereas net foreign assets (NFA) held steady, which market. resulted in a rise of HRK 2.4bn (0.7%) in total liquid assets. The Interest rates on the European money market remained in neg- monthly increase in NDA was driven by the growth of placements ative territory in March 2020 on the back of highly expansionary to domestic sectors and by net claims on central government. The monetary policy measures taken by the . The growth of M4 continued to accelerate, standing at 5.7% in Febru- overnight interest rate for the euro area banking market, EONIA, ary (transaction based), partly due to less favourable monthly trends increased only slightly to –0.44% and the six-month to in total liquid assets in February in the previous year (Figure 49). –0.29% (Figure 24). Due to the deterioration of economic conditions The annual growth of money (M1) also continued its upward trend, caused by the spread of the coronavirus, risk premiums for all Euro- reaching 18.8% in February (Figure 48), while the decrease in quasi- pean emerging market countries widened in March (Figure 25). The money decelerated slightly on an annual basis to –1.8% (transaction risk premium for Croatia was 76 basis points at the end of March, up based). from the 48 basis points at the end of February. Total placements of monetary institutions to domestic sectors (ex- The liquidity of the domestic financial system has remained cept central government) increased by HRK 2.3bn in February, with high, supported by monetary policy measures taken by the central their annual growth (transaction based) accelerating to 4.8% (Fig- bank during the crisis caused by the coronavirus epidemic. In mid- ure 40), driven by placements to non-financial corporations rising March, the CNB conducted a structural operation, releasing to banks at an annual rate of 1.4% (Figure 41). In contrast, the annual growth CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020 5 of household placements slowed down slightly to 7.3% (Figure 42) account with the central bank, international reserves decreased by as a result of a slowdown in the annual growth of general-purpose EUR 0.8bn in the same period. As a result, the financial account of cash loans (10.9%), while the growth of housing loans accelerated the balance of payments, including international reserves, had a net to 6.7%. As regards the currency structure, the share of kuna place- capital inflow of EUR 0.4bn, mainly generated by the mentioned ments in total household placements continued a several-year-long deterioration in the external position of banks. In contrast to debt growth trend, reaching 54.8% at the end of February (Figure 47). liabilities, net equity liabilities rose. The net inflow of equity invest- The annual growth in the nominal stock of placements (3.5%) re- ments was for the most part due to the retained earnings of enter- mained lower in February than the transaction based growth, mainly prises and banks in foreign ownership, whereas direct equity invest- due to the sale of non-performing corporate placements. ments were very low and were mostly made in the real estate sec- Gross international reserves decreased by EUR 3.0bn (15.3%) in tor and in accommodation services. As shown by available data for March 2020, standing at EUR 16.5bn at the end of the month (Fig- January 2020, net external debt decreased early in the year. ure 56).The decrease resulted from the sales of foreign exchange to As shown by monthly MoF data4, general government showed a banks aimed at preserving the stability of the exchange rate of the deficit of HRK 1.3bn in January 2020, an unfavourable performance kuna versus the euro. Gross international reserves were EUR 2.0bn compared with the mild surplus in the same period in 2019. The (11.0%) lower than at the end of the previous year. Net international budget deficit in January 2020 reflects a stronger growth of expendi- reserves dropped by EUR 1.9bn (10.9%), amounting to EUR 15.8bn tures (13.7%) than of revenues (3.0%). at the end of the month. Consolidated general government debt totalled HRK 293.0bn at Net foreign financial liabilities of domestic sectors fell by EUR the end of December 2019, an increase of HRK 7.4bn from the end 0.4bn in the last quarter of 2019 (excluding the change in the gross of 2018. The increase in public debt at the end of December 2019 international reserves and liabilities of the CNB) due to a decrease from the end of the previous year was due to the partial collection in net debt liabilities (Figure 59). As regards the sectoral structure of of funds to finance liabilities in 2020 based on the domestic issues debt investments, while the net external position of banks deteriorat- of long-term securities in November 2019 and, in a smaller measure, ed significantly, other domestic sectors’ net debt liabilities decreased to the depreciation of the kuna exchange rate versus the euro and the and so did, to an even greater extent, those of the government. The dollar. However, due to an increase in nominal GDP, the public debt government’s deleveraging resulted from the repayment of a USD to GDP ratio fell slightly in December 2019, down to 73.2% from 1.5bn bond that fell due. As the bulk of funds for bond repayment 74.7% at the end of 2018. was obtained by withdrawing the funds previously deposited in the

Figure 1 Quarterly gross domestic product Figure 2 GDP rate of change seasonally adjusted real values contributions by components

% 8 116 8 8 %

6 6

6 112 2015 = 100 4 4 percentage points 108 4 2 2

0 0 2 104

–2 –2 0 100 –4 –4

–2 96 –6 –6 2013 2014 2015 2016 20172018 2019 2020 2012 2013 2014 2015 2016 2017 2018 2019

Year-on-year rate of change of GDP Imports of goods and services Gross fixed capital formation Level of GDP (seasonally adjusted values) – right Exports of goods and services Government consumption Changes in inventories Household consumption Note: Data for the first quarter of 2020 are estimated with the use of the CNB’s Gross domestic product – right monthly indicator of real economic activity, on the basis of data published until 6 March 2020. Sources: CBS data seasonally adjusted by the CNB and CNB calculations. Source: CBS.

4 Monthly data for central government, state government and social security sub-sectors that, pursuant to Council Directive 2011/85/EU, must be published be- fore the end of the following calendar month. The published data refer to general government units according to the scope of the ESA 2010 statistical methodol- ogy, except for data for local government, which are published on a quarterly basis. 6 CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020

Figure 3 Industrial production Figure 6 Buildings and civil engineering works

% 9 112 160 12 % 2015 = 100 6 108 2015 = 100 140 8

3 104 120 4

0 100 100 0

–3 96 80 –4

–6 92 60 –8 2013 2014 2015 2016 2017 2018 2019 2020 2013 20142015 2016 2017 2018 2019 2020 Civil engineering works (trend-cycle) Quarterly rate of change of seasonally adjusted index Buildings (trend-cycle) Trend-cycle – right Buildings (quarterly rate of change) – right Civil engineering works (quarterly rate of change) – right

Note: Data for the first quarter 2020 refer to January and February. Source: CBS data seasonally adjusted by the CNB. Source: CBS data seasonally adjusted by the CNB.

Figure 4 Industrial production by main industrial groupings Figure 7 Real retail trade turnover seasonally adjusted indices

130 % 6 124

5 120 2015 = 100 120 2015 = 100 4 116

112 110 3 2 108

100 1 104

0 100 90 –1 96

80 –2 92 2013 2014 2015 2016 20172018 2019 2020 2013 20142015 2016 2017 2018 2019 2020

Intermediate goods Non-durable consumer goods Energy Quarterly rate of change of seasonally adjusted index Capital goods Durable consumer goods Trend-cycle – right

Note: Quarterly data are calculated as the average of monthly data. Note: Data for the first quarter of 2020 refer to January and February. Source: CBS data seasonally adjusted by the CNB. Source: CBS data seasonally adjusted by the CNB.

Figure 5 Total volume of construction works Figure 8 Consumer and business confidence indicators standardised and seasonally adjusted values

% 8 140 130

6 130

2015 = 100 120 4 120

2 110 110

0 100 100

–2 90 90 –4 80

–6 70 80 2012 2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019 2020

Construction business confidence indicator Industry business confidence indicator Quarterly rate of change of seasonally adjusted index Retail trade business confidence indicator Long-run average = 100 Trend-cycle – right Services business confidence indicator CCI consumer confidence index

Note: Data for the first quarter of 2020 refer to January. Source: CBS data seasonally adjusted by the CNB. Sources: Ipsos and CNB data seasonally adjusted by the CNB. CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020 7

Figure 9 EU confidence indices Figure 12 Imports of capital equipment and road seasonally adjusted series vehicles (c.i.f.)

20 120 0.42 40

0.36 30 10 108 billion EUR 0.30 20

0 96 0.24 long-run average = 100 10 in %, seasonally adjusted in %, in %, balance of responses in %, 0.18 0 –10 84 0.12 –10

–20 72 0.06 –20

0.00 –30 –30 60 20122013 2014 2015 2016 2017 2018 2019 20132014 2015 2016 2017 2018 2019 2020 Imports of road vehicles (trend-cycle) Industrial confidence index Imports of capital equipment (trend-cycle) Consumer confidence index Imports of road vehicles (quarterly rate of change) – right Economic Sentiment Index (ESI) – right Imports of capital equipment (quarterly rate of change) – right

Note: Imports of capital equipment (SITC divisions 71 – 77). Source: Eurostat. Source: CBS data seasonally adjusted by the CNB.

Figure 10 Goods exports (f.o.b.) Figure 13 Trade in goods balance

1.4 30 0.2 1.3 25 0.0 billion EUR 1.2 20 billion EUR 1.1 15 –0.2 1.0 10 –0.4 0.9 5 seasonally adjusted in %, 0.8 0 –0.6 0.7 –5 –0.8 0.6 –10 0.5 –15 –1.0 0.4 –20 20122013 2014 2015 2016 2017 2018 2019 –1.2 2012 2013 2014 2015 2016 2017 2018 2019 Total exports (trend-cycle) Exports excl. energy (trend-cycle) Energy sources Capital goods Ships Food Total exports (quarterly rate of change) – right Road vehicles Other Exports excl. energy (quarterly rate of change) – right Raw materials excl. food and energy Total Note: Series are shown as three-member moving averages of monthly data. Data for the fourth quarter of 2019 refer to October and November. Source: CBS data seasonally adjusted by the CNB. Source: CBS.

Figure 11 Goods imports (c.i.f.) Figure 14 Employment by NCA activities seasonally adjusted data, contributions to the quarterly rate of change

2.2 20 1.2 1,570

2.0 16 0.8 1,540 billion EUR 0.4 1,510 in thousand 1.8 12 percentage points 0.0 1,480 1.6 8

in %, seasonally adjusted in %, –0.4 1,450

1.4 4 –0.8 1,420

1.2 0 –1.2 1,390 –1.6 1,360 1.0 –4 –2.0 1,330 0.8 –8 2012 2013 2014 20152016 2017 2018 2019 –2.4 1,300 20122013 2014 20152016 2017 2018 2019 2020 Total imports (trend-cycle) Imports excl. energy (trend-cycle) Public sector (O, P, Q) Other Industry (B, C, D, E) Total imports (quarterly rate of change) – right Construction (F) Service activities (G, H, I) Imports excl. energy (quarterly rate of change) – right IT sector and business activities (J, M, N) Employment – right

Note: Data for the first quarter of 2020 refer to January and February. Source: CBS data seasonally adjusted by the CNB. Source: CPII data seasonally adjusted by the CNB. 8 CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020

Table 1 Price indicators Figure 15 Unemployment rates year-on-year and month-on-month rates of change seasonally adjusted data Year-on-year Month-on-month rates rates

% 22 1/2020 2/2020 2/2019 2/2020 20 Consumer price index and its components 18 Total index 2.0 1.5 0.2 –0.3 16 Energy 4.4 0.9 1.7 –1.7 14 Unprocessed food 5.6 4.1 0.9 –0.6 12 Processed food 1.9 2.0 –0.3 –0.2 10 Non-food industrial goods without –0.2 0.2 –0.2 0.2 8 energy 6 Services 1.7 1.9 –0.2 0.0 2012 2013 2014 20152016 2017 2018 2019 2020 Other price indicators Registered unemployment rate Adjusted unemployment rate ILO unemployment rate Core inflation 1.4 1.5 –0.2 0.0 Index of industrial producer prices Note: Since January 2015, the calculation of the registered unemployed rate has used 1.8 1.3 0.5 –0.1 the data on employed persons from the JOPPD form. Data on the number of on the domestic market employed persons have been revised backwards for the period from January 2016 to Brent crude oil price (USD) 7.3 –14.2 8.2 –13.5 July 2019. The adjusted unemployment rate is the CNB estimate and is calculated as the share of the number of registered unemployed persons in the working age HWWI index (excl. energy, USD) 6.0 –3.8 4.8 –4.9 population (unemployed persons and persons insured with the CPII). Data for the first Note: Processed food includes alcoholic beverages and tobacco. quarter of 2020 refer to January and February. Sources: CBS, Bloomberg and HWWI. Sources: CBS and CNB calculations (seasonally adjusted by the CNB).

Figure 16 Average nominal gross and net wage Figure 18 Year-on-year inflation rate and contributions of seasonally adjusted data, quarterly rate of change components to consumer price inflation

% 4 8000 3 HRK 3 7000 2 2 6000

1 5000 percentage points 1 0 4000

–1 3000 0 –2 2000 2013 2014 20152016 2017 2018 2019 2020 –1 Industry (B, C, D, E) Public sector (O, P, Q) Private sector Nominal gross wage Nominal gross wage, old methodology Nominal net wage increased by compensation - right Nominal net wage - right –2 2015 2016 2017 2018 2019 Note: Data on the average nominal gross wage by activity refer to data from the RAD-1 form, and from January 2016 to data from the JOPPD form. Data on average Energy Unprocessed food Processed food wages paid in February 2020 were reported in full-time equivalent, in contrast with Non-food industrial goods without energy Services the previous periods, when average wages were calculated by dividing total Core inflation (%)a Consumer price index (%) disbursements by the number of employees who received these disbursements, excluding all those who worked fewer than 80 hours per month. Data on disburse- a Core inflation does not include agricultural product prices, energy prices and ments paid before 2018 are CNB estimates. administered prices. Sources: CBS and CNB calculations (seasonally adjusted by the CNB). Sources: CBS and CNB calculations.

Figure 17 Consumer price index and core inflation Figure 19 Crude oil prices (Brent) annualised month-on-month rate of changea

% 8 130 850 120 750 HRK/barrel USD/barrel 110 4 100 650 90 80 550 0 70 450 60 350 –4 50 40 250 30 –8 20 150 2013 2014 2015 2016 2017 2018 2019 2020 201220132014 2015 2016 2017 2018 2019

Consumer price index Core inflation Brent (USD/barrel) Brent (HRK/barrel) – right

a The month-on-month rate of change is calculated based on the quarterly moving average of seasonally adjusted consumer price indices. Sources: CBS and CNB calculations. Sources: Bloomberg and CNB calculations. CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020 9

Figure 20 HWWI index (excl. energy) Figure 23 Contributionsa of individual currencies to the monthly rate of change of the average index of the nominal effective kuna exchange rate (INEER)

170 1.5

160 1.0

2015 = 100 150 0.5 140 percentage points

130 0.0

120 –0.5 110 –1.0 100 –1.5 90

80 –2.0 201220132014 2015 2016 2017 2018 2019 20132014 2015 20162017 2018 2019 2020

HWWI index (USD) HWWI index (HRK) EUR USD CHF Other currencies INEER (%)

a Negative values indicate contributions to the appreciation of the INEER. Sources: HWWI and CNB calculations. Source: CNB.

Figure 21 Daily nominal exchange rate – HRK vs. EUR, USD Figure 24 Interest rates on the euro and the average yield and CHF spread on bonds of European emerging market countries CNB midpoint exchange rate

9.5 8.0 % 1.5 300

9.0 7.5

1.0 200 basis points 8.5 7.0 0.5 100 8.0 6.5

7.5 6.0 0.0 0

7.0 5.5 –0.5 –100

6.5 5.0 –1.0 –200 6.0 4.5 2013 2014 20152016 2017 2018 2019 2020 20132014 2015 2016 2017 2018 2019 2020 ECB benchmark rate EONIA 6M EURIBOR EMBI spreads for European emerging market countries – right EUR/HRK USD/HRK – right CHF/HRK – right

Note: EMBI, or the Emerging Market Bond Index, shows the spread between yields on government securities of emerging market economies, Croatia included, and risk-free securities issued by developed countries. Source: CNB. Sources: ECB, Bloomberg and J.P. Morgan.

Figure 22 Nominal and real effective exchange rates Figure 25 CDS spreads for 5-year government bonds of of the kuna selected countries

170 450 160 400 150 basis points 350 140 index, 2010 = 100 index, 130 300 120 250 110 200 100 150 90 100 2020 2014 2015 2016 2017 2018 2019 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 50 Nominal Real (PPI) Real (ULC total economy) Real (CPI) 0 2013 20142015 2016 2017 2018 2019 2020 Real (ULC manufacturing) Bulgaria Czech R. Croatia Hungary Note: The real effective exchange rate of the kuna deflated by producer prices Poland Romania Slovenia Slovak R. includes the Croatian index of industrial producer prices on the total market. The unit Germany Italy labour cost is calculated as the ratio between compensation per employee and labour productivity (defined as GDP per person employed), while the real effective exchange rate of the kuna deflated by unit labour costs is the result of the interpolation of Note: Credit default swaps (CDS) spread is an annual premium that a CDS buyer pays quarterly values. A fall in the index indicates an effective appreciation of the kuna. for protection against credit risk associated with an issuer of an instrument. Source: CNB. Source: S&P Capital IQ. 10 CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020

Figure 26 CDS spreads for selected parent banks of Figure 29 Long-term financing costs in kuna with a currency domestic banks clause and in foreign currency

500 % 10

8

basis points 400 6 300 4

200 2

100 0 2013 2014 2015 2016 2017 2018 2019 2020

Long-term corporate loans with a currency clause 0 Long-term housing loans to households with a currency clause 2013 2014 2015 2016 2017 2018 2019 2020 Yield on generic 10-year German bond + EMBI Croatia Long-term household loans with a currency clause, excl. housing loans Unicredit S.p.A. Société Générale 546/547-day T-bills (EUR, indexed to f/c) 455-day T-bills (EUR, indexed to f/c) Erste Group Bank AG Raiffeisen Bank International AG Intesa Sanpaolo S.p.A. Note: EMBI, or the Emerging Market Bond Index, issued by developed countries, shows the spread between yields on government securities of emerging market economies, Croatia included, and risk-free securities of developed countries. Source: S&P Capital IQ. Sources: MoF, Bloomberg and CNB.

Figure 27 Overnight interest rates and turnovers Figure 30 Bank interest rates on loans to non-financial corporations by volume

% 0.4 80 8

0.3 7

0.2 60 6 promet u mlrd.HRK

0.1 5 NIR on new loans, in % 0.0 40 4 –0.1 3 –0.2 20 2 –0.3 1 –0.4 0 2019 2020 0 Bank repo operations – right Interbank trading – right 2013 2014 201520162017 2018 2019 2020 Bank deposit trading – right Interest rate on interbank demand deposit trading Interest rate spread between loans up to HRK 7.5m and loans over HRK 7.5m Interbank interest rate Interest rate on bank repo operations Loans up to HRK 7.5m Loans over HRK 7.5m Implied interest rate on interbank fx swap trading

Source: CNB. Source: CNB.

Figure 28 Short-term financing costs in kuna without a Figure 31 Interest rates on original new loans to non- currency clause financial corporations

% 12 % 10

10 8

8 6

6 4 4 2 2 0 0 20152016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019 2020 Working capital loans in kuna 364-day T-bills (HRK) Working capital loans in kuna indexed to f/c Short-term kuna corporate loans without a currency clause Investment loans in kuna indexed to f/c Short-term kuna household loans without a currency clause Revolving loans, overdrafts and credit card credit in kuna

Sources: MoF and CNB. Source: CNB. CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020 11

Figure 32 Interest rates on original new housing loans to Figure 35 Interest rates on corporate time deposits households

% 5.5 % 8

7 5.0 6 4.5 5

4.0 4

3 3.5 2 3.0 1

2.5 0 201520162017 2018 2019 2020 2013 2014 2015 2016 2017 2018 2019 2020

Short-term corporate time deposits in kuna Short-term corporate time deposits in f/c Housing loans in kuna Housing loans in f/c Total housing loans Long-term corporate time deposits in kuna Long-term corporate time deposits in f/c Total corporate time deposits

Source: CNB. Source: CNB.

Figure 33 Interest rates on original new consumer and other Figure 36 Average interest rates on loans (excl. revolving loans to households loans) and deposits

% 10 % 10

9 8

8 6 7

4 6

5 2

4 2015 2016 2017 2018 2019 2020 0 2013 2014 2015 2016 2017 2018 2019 2020 Consumer loans in kuna Consumer loans in f/c Loans – balances Loans – new Total consumer loans Other loans Deposits – balances Deposits – newa

Note: Consumer loans include total loans to households excl. housing and other loans. Other loans to households (denominated almost exclusively in kuna) include a For time deposits, interest rates on newly received deposits are weighted by their credit card loans, overdrafts, revolving loans and receivables on charge cards. balances. Source: CNB. Source: CNB.

Figure 34 Interest rates on household time deposits Figure 37 Spread between interest rates on loans (excl. revolving loans) and interest rates on deposits

% 5 % 9

8 4 7

3 6

5 2 4

1 3

2 0 2013 2014 2015 2016 2017 2018 2019 2020 2013 2014 201520162017 2018 2019 2020 Loans in kuna – Deposits in kunaa Total – new Short-term household time deposits in kuna Short-term household time deposits in f/c Loans in kunab – Deposits in f/c Total – balances Long-term household time deposits in kuna Long-term household time deposits in f/c Total household time deposits Note: Spread between average interest rates on loans and average interest rates on deposits should be differentiated from net interest margin (the ratio of the difference between interest income and interest expenses to total assets of credit institutions). Source: CNB. Source: CNB. 12 CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020

Figure 38 Net foreign assets, net domestic assets and total Figure 41 Placements to corporates liquid assets (M4) absolute change in the last 12 months

30 2 16 %

12 billion HRK 20 billion HRK 1 8

4 10 0 0

0 –4 –1 –8 –10 –12

–2 –16 –20 2013 2014 2015 2016 2017 2018 2019 2020 201320142015 2016 2017 2018 2019 2020 Transactions in corporate placements Net foreign assets Net domestic assets M4 Year-on-year rate of change (balance-based) – right Year-on-year rate of change (transaction-based) – right

Source: CNB. Source: CNB.

Figure 39 Net domestic assets, structure Figure 42 Placements to households absolute change in the last 12 months

25 1.6 10 %

billion HRK 15 billion HRK 0.8 5

5 0.0 0 –5

–0.8 –5 –15

–25 –1.6 –10 2013 2014 2015 2016 2017 2018 2019 2020 201320142015 2016 2017 2018 2019 2020 Transactions in household placements Net placements to the government Placements Year-on-year rate of change (balance-based) – right Other net assets Net domestic assets Year-on-year rate of change (transaction-based) – right

Source: CNB. Source: CNB.

Figure 40 Placements Figure 43 Annual rate of change in household placements transaction-based

3 15 % % 30 25

billion HRK 2 10 20

15 1 5 10

0 0 5 0

–1 –5 –5

–10 –2 –10 2013 2014 2015 2016 2017 2018 2019 2020 –15 201320142015 20162017 2018 2019 2020

Transactions in total placements Year-on-year rate of change (balance-based) – right Kuna household placement F/c household placements Year-on-year rate of change (transaction-based) – right Total household placements

Source: CNB. Source: CNB. CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020 13

Figure 44 Annual rate of change in corporate placements Figure 47 Share of kuna placements in total sector transaction-based placements

% 15 % 60

55 10 50

5 45 40

0 35

30 –5 25

–10 20 2013 2014 2015 2016 2017 2018 2019 2020 2013 2014 2015 2016 2017 2018 2019 2020

Kuna corporate placement F/c corporate placements Placements to non-financial corporations Placements to households Total corporate placements Placements to other sectors (incl. the government sector)

Source: CNB. Source: CNB.

Figure 45 Structure of credit institution placements Figure 48 Money (M1)

350 150 45 % 140 40 300 billion HRK billion HRK 130 35 250 120 30 110 25 200 100 20

150 90 15 80 10 100 70 5 60 0 50 50 –5 0 40 –10 2013 2014 20152016 2017 2018 2019 201320142015 2016 2017 2018 2019 2020

Placements to other sectors Placements to the central government M1 (balance) Year-on-year rate of change (balance-based) – right Placements to households Placements to corporates Year-on-year rate of change (transaction-based) – right

Note: From March 2019, the growth rate (transaction-based) excludes the effect of the reclassification of money market funds. Source: CNB. Source: CNB.

Figure 46 Credit institution and MMF placements to the Figure 49 Total liquid assets (M4) central government

100 50 % 350 16 %

90 40 billion HRK billion HRK 320 12 80 30

290 8 70 20

60 10 260 4

50 0 230 0 40 –10

30 –20 200 –4 20132014 2015 2016 2017 2018 2019 2020 201320142015 2016 2017 2018 2019 2020

M4 (balance) Placements to the central government (balance) Year-on-year rate of change (balance-based) – right Year-on-year rate of change – right Year-on-year rate of change (transaction-based) – right

Source: CNB. Source: CNB. 14 CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020

Figure 50 Structure of M4 monetary aggregate Figure 53 Share of kuna sources

360 % 50 320 45 billion HRK 280 40 240 200 35

160 30 120 25 80 40 20

0 15 2013 2014 20152016 2017 2018 2019 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2020

M1 Kuna deposits Foreign currency deposits Share of kuna sources in total sources of other monetary financial institutions Bonds, money market instruments and MMFs shares/units Share of kuna sources in total sources of other monetary financial institutions (excl. demand deposits)

Source: CNB. Source: CNB.

Figure 51 Kuna savings and time deposits Figure 54 Bank liquidity and overnight interest rate on bank demand deposit trading

37 45 % % 1.6 40

1.4 35 billion HRK billion HRK 34 30 1.2 30 1.0 25

0.8 20 31 15 0.6 15

0.4 10 28 0 0.2 5

0.0 0 25 –15 2013 2014 2015 2016 2017 2018 2019 2020 201320142015 2016 2017 2018 2019 2020 Overnight interbank interest rate Liquidity surplus (incl. overnight deposits with the CNB) – right Kuna deposits (balance) Note: Liquidity surplus is the difference between the balance in bank settlement Year-on-year rate of change – right accounts with the CNB and the amount that banks are required to hold in their accounts after the calculation of reserve requirements.The overnight interest rate until the end of 2015 refers to the overnight interbank interest rate and as of the beginning of 2016 to the overnight interest rate on bank demand deposit trading. Source: CNB. Source: CNB.

Figure 52 Foreign currency deposits Figure 55 Spot transactions in the foreign exchange market (net turnover)

180 16 % 3

2 billion EUR billion HRK 170 12 1

0 160 8 –1

150 4 –2

–3 140 0 –4

130 –4 –5 2013 2014 2015 2016 2017 2018 2019 2020 2013 2014 2015 2016 2017 2018 2019 2020 Bank transactions with legal persons Bank transactions with natural persons Foreign currency deposits (balance) Bank transactions with foreign banks Bank transactions with the CNB Year-on-year rate of change (balance-based) – right Total bank transactions CNB transactions with government and the EC Year-on-year rate of change (transaction-based) – right Note: Positive values indicate net purchases and negative values indicate net sales. Legal persons include the government. Source: CNB. Source: CNB. CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020 15

Figure 56 International reserves of the CNB Figure 58 Financial account flows by type of investment at current rate of exchange

23 5 10 4 8 21 billion EUR billion EUR

3 6 as % of GDP 19 2 4

17 1 2 0 0 15 –1 –2 13 –2 –4 –3 –6 11 –4 –8 9 2012 201320144 2015 2016 2017 2018 2019 2013 20142015 20162017 2018 2019 2020 Direct investment Portfolio investment Other investment Change in gross international reserves a International reserves Net usable international reserves Financial derivatives Total net flowsa – right

a Sum of the last four quarters. a NUIR = international reserves – foreign liabilities – reserve requirements in f/c Note: A positive value indicates net outflow of equity abroad (including on the basis – foreign currency government deposits. of the growth in international reserves). Source: CNB. Source: CNB.

Figure 57 Current and capital account flows Figure 59 Financial account flows by equity to debt ratio

8 8 5 15 4 12 6 6 billion EUR billion EUR as % of GDP 3 9 as % of GDP 4 4 2 6

2 2 1 3 0 0 0 0 –1 –3

–2 –2 –2 –6 –3 –9 –4 –4 2012 2013 2014 2015 2016 2017 2018 2019 2012 20132014 2015 2016 2017 2018 2019 Equity liabilities, net Change in international reservesa Primary income Secondary income Services Debt liabilities, net excl. reserves Financial derivatives Goods Capital transactions Current and capital account Total net capital flows excl. reservesa Total net capital flowsb – right Current and capital accounta – right Total net capital flows excl. reservesa,b – right Current and capital account excl. one-off effectsa – right a The change in gross international reserves is reported net of foreign liabilities of the a Sum of the last four quarters. CNB. b Sum of the last four quarters. Note: One-off effects include conversion of CHF-linked loans in 2015 and bank Note: A positive value indicates net outflow of equity abroad. Net flows represent the provisions for loans to the Agrokor Group in 2017 and 2018. difference between the change in assets and the change in liabilities. Source: CNB. Source: CNB.

Table 2 Balance of payments Figure 60 Net external debt transactions preliminary data, in million EUR

Indices 2018 2019 2018/ 2019/ 3 2017 2018 2 billion EUR Current account 982.1 1,570.8 58.5 159.9 1

Capital account 729.8 1,117.1 135.7 153.1 0 –1 Financial account 241.8 1,427.4 –114.5 590.2 (excl. reserves) –2 –3 International reserves 1,545.0 989.6 59.6 64.1 –4 Net errors and 75.0 –270.8 45.3 –361.2 –5 omissions 2013 2014 2015 2016 2017 2018 2019 2020

Note: In line with the 6th edition of the Balance of Payments and International Investment General government Croatian National Bank Other MFIs Position Manual (BPM6). Other sectors Direct investment Total Source: CNB. Note: Transactions refer to the change in debt excl. cross-currency changes and other adjustments. Net external debt is calculated as the gross external debt stock net of foreign debt claims. Data for the first quarter of 2020 refer to January. Source: CNB. 16 CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020

Figure 61 Gross external debt transactions Table 3 Consolidated general government balance ESA 2010, in million HRK

Jan. –Sep. 2018 Jan. –Sep. 2019

3 Total revenue 131,997 142,231

2 Direct taxes 17,208 18,689 billion EUR Indirect taxes 57,912 61,600 1 Social contributions 34,439 35,366 0 Other 22,438 26,576 –1 Total expenditure 126,965 135,793

–2 Social benefits 43,721 44,952 Subsidies 5,158 5,653 –3 Interest 6,853 6,629 –4 Compensation of employees 32,881 34,378 2013 20142015 2016 2017 2018 2019 2020 Intermediate consumption 23,125 24,152 General government Croatian National Bank Other MFIs Other sectors Direct investment Total Investment 7,383 9,207 Other 7,845 10,822 Note: Transactions refer to the change in debt excl. cross-currency changes and other adjustments. Data for the first quarter of 2020 refer to January. Net lending (+)/borrowing (–) 5,032 6,438 Source: CNB. Sources: Eurostat and CBS.

Figure 62 Gross external debt Table 4 Consolidated central government net borrowing end of period GFS 2001, in million HRK

Jan. – Nov. 2018 Jan. – Nov. 2019

60 1 Revenue 136,049 145,610

2 Disposal of non-financial assets 504 772

billion EUR 50 3 Expenditure 126,510 135,487

40 4 Acquisition of non-financial assets 3,292 4,290

30 5 Net borrowing (1 + 2 – 3 – 4) 6,751 6,606 Sources: MoF and CNB calculations. 20

10 Table 5 General government debt in million HRK 0 20132014 2015 20162017 2018 2019 Dec. 2018 Dec. 2019 Change in total debt stock 1,218 6,882 General government Croatian National Bank Other MFIs Other sectors Direct investment Change in domestic debt stock 8,319 15,859 – Securities other than shares, short-term –721 471 Note: Data are up to January 2020. – Securities other than shares, long-term 7,022 14,148 Source: CNB. – Loans 2,108 1,430 Change in external debt stock –7,101 –8,977 Figure 63 General government debt – Securities other than shares, short-term –145 –5 – Securities other than shares, long-term –4,230 –3,142 – Loans –2,725 –5,830 100 100 84.7 84.3 90 81.2 80.8 90 Memo item: 77.8 73.2 70.1 74.7 80 80 as % of GDP Change in total guarantees issued –1,074 –800 70 70 Source: CNB. 60 60 50 50 40 40 30 30 share in general government debt, % 20 20 10 10 0 0 2012 2013 2014 2015 2016 2017 2018 12/2019

Domestic general government debt External general government debt SGP reference value (60%) – right General government debt – right

Note: Nominal GDP for the last four available quarters was used for the calculation of the relative indicator. Source: CNB. CNB • INFORMATION ON ECONOMIC TRENDS • APRIL 2020 17 Abbreviations and symbols

Abbreviations OECD – Organisation for Economic Co-Operation and De- velopment BIS – Bank for International Settlements OG – Official Gazette bn – billion R – Republic b.p. – basis points o/w – of which BOP – balance of payments PPI – producer price index c.i.f. – cost, insurance and freight RTGS – Real-Time Gross Settlement CBRD – Croatian Bank for Reconstruction and Development Q – quarterly CBS – Croatian Bureau of Statistics RR – reserve requirement CCI – consumer confidence index SDR – special drawing rights CDCC – Central Depository and Clearing Company Inc. SITC – Standard International Trade Classification CDS – credit default swap SGP – Stability and Growth Pact CEE – Central and Eastern European VAT – value added tax CEFTA – Central European Free Trade Agreement WTO – World Trade Organization CEI – consumer expectations index ZMM – Zagreb Money Market CES – Croatian Employment Service ZSE – Zagreb Stock Exchange CHIF – Croatian Health Insurance Fund CLVPS – Croatian Large Value Payment System Three-letter currency codes CM – Croatian Motorways CNB – Croatian National Bank ATS – CPF – Croatian Privatisation Fund CHF – Swiss franc CPI – consumer price index CNY – Yuan Renminbi CPII – Croatian Pension Insurance Institute DEM – German mark CR – Croatian Roads EUR – euro CSI – consumer sentiment index FRF – DAB – State Agency for Deposit Insurance and Bank Reso- GBP – lution HRK – dep. – deposit ITL – DVP – delivery versus payment JPY – Japanese yen EC – European Commission USD – US dollar ECB – European Central Bank EFTA – European Free Trade Association Two-letter country codes EMU – Economic and Monetary Union ESI – economic sentiment index BG – Bulgaria EU – CZ – Czech R. excl. – excluding EE – Estonia f/c – foreign currency HR – Croatia FDI – foreign direct investment HU – Hungary Fed – Federal Reserve System LV – Latvia FINA – Financial Agency LT – Lithuania FISIM – financial intermediation services indirectly measured PL – Poland f.o.b. – free on board RO – Romania GDP – gross domestic product SK – Slovak R. GVA – gross value added SI – Slovenia HANFA – Croatian Financial Services Supervisory Agency HICP – harmonised index of consumer prices Symbols ILO – International Labour Organization IMF – International Monetary Fund – – no entry incl. – including .... – data not available IPO – initial public offering 0 – value is less than 0.5 of the unit of measure being m – million used MIGs – main industrial groupings  – average MM – monthly maturity a, b, c,... – indicates a note beneath the table and figure MoF – Ministry of Finance * – corrected data NCA – National Classification of Activities ( ) – incomplete or insufficiently verified data NCB – national central bank NCS – National Clearing System n.e.c. – not elsewhere classified