Croatia's Slump Continued at Slower Pace, Survey Shows

Croatia’s economy probably shrank at a slower pace than a year earlier in the first quarter as rising construction and energy output damped the effect of falling consumption and investments.

Gross domestic product contracted 1.6 percent from the first quarter of 2012, according to the median estimate of four economists in a Bloomberg survey, less than the 2.3 percent drop in the previous three-month period. The statistics office will publish the data tomorrow at 11 a.m. in Zagreb.

The economy in Croatia, which joins the EU July 1, hasn’t grown since 2008 because of Europe’s debt crisis, pushing foreign direct investment down last year to almost a fifth of 2008’s $4.2 billion. The nation is counting on 10 billion euros ($13 billion) in EU funds through 2020 to reignite growth.

“The recession will continue this year, but the decline will soften in the second half of the year,” said Velimir Sonje, an economist at the Zagreb School of Economics and Management. “In the short term, the effects of the EU entry will not be significant.”

The government forecasts 0.7 percent growth this year after last year’s 2 percent contraction. The European Commission said on May 3 said Croatia’s GDP will drop 1 percent in 2013 as domestic demand continues to decline, while net exports will provide “limited support’ to growth of 0.2 percent in 2014.

The yield on Croatia’s dollar-denominated bond maturing July 2020 climbed to 4.625 percent at 10:40 a.m. in Zagreb, the highest since April 4. The cost of insuring the debt with five-year credit-default swaps, which rise as perceptions of creditworthiness worsen, rose to 299 from 291 yesterday.

Revival Signs

‘‘The decline has softened as the building industry showed signs of revival and weather conditions resulted in a double-digit increase in electricity production,” Zdeslav Santic, the chief economist at Soc-Gen (GLE) Splitska Banka d.d., said. “The key issue is whether the private sector will succeed in awakening investment in the second half, and how strong the immediate impact of EU entry will be.”

The country’s debt is rated junk by Standard & Poor’s and Moody’s Investors Services, citing the stalled recovery, a lack of budget discipline and vulnerability to external shocks. Fitch Ratings gives the nation its lowest investment grade.

Public debt will increase to 55 percent of economic output this year, while state borrowing will total 27 billion kuna ($4.7 billion), the government forecasts.

The government on March 21 said it would try to limit this year’s public deficit to 2012’s estimated 3.4 percent of GDP, compared with an earlier forecast of 3.9 percent, by cutting investment in water projects.

To contact the reporters on this story: Manish Modi in New Delhi at mmodi6@bloomberg.net; Jasmina Kuzmanovic in Zagreb at jkuzmanovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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