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EU11 Regular Economic Report

EU11 Regular Economic Report. Macroeconomic Report: Focus on Croatia. Entering the fifth year of recession. Croatia: Quarterly GDP growth, y/y. EU 11 and EU15: GDP growth, y/y. Source: Eurostat, CROSTAT, World Bank staff calculations. Deteriorating Labor Market Conditions.

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EU11 Regular Economic Report

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  1. EU11 Regular Economic Report Macroeconomic Report: Focus on Croatia

  2. Entering the fifth year of recession Croatia: Quarterly GDP growth, y/y EU 11 and EU15: GDP growth, y/y Source: Eurostat, CROSTAT, World Bank staff calculations

  3. Deteriorating Labor Market Conditions Sour labor market developments, Croatia, in % Less opportunities (or incentives) even in the informal sector Source: CROSTAT, World Bank staff calculations

  4. External Position Slightly Improved • External debt although high, shrank slightly due to bank deleveraging – some 20 pp of GDP above EU11 • CAD turned positive in Q4 2012 while net FDI inflow improved CAD and Net FDI (% of GDP) External Debt (% of GDP) Source: CNB, CROSTAT, World Bank staff calculations

  5. Public Debt on Rise • Stronger fiscal consolidation required, especially on the expenditure side • 2013 plans hardly achievable Public Debt and Deficit (% of GDP) Note: Fiscal deficit assessed for 2008-2011 as per the required ESA95 coverage Source: MOF, CROSTAT, World Bank staff calculations

  6. Weak Signs of Bottoming Out? Tourism recovered to pre-crisis levels, but low impact on trade… High frequency indicators Source: CNB, CROSTAT, World Bank staff calculations

  7. Some Softening of the Labor Market Source: CROSTAT, HZZ, World Bank staff calculations

  8. However, Structural Problems Deepened Job destruction in industry continued; public sector employment dominated Labor market entry for youth particularly constrained Source: CROSTAT, HZZ, World Bank staff calculations

  9. Reform agenda – seizing opportunities • 84th in the World Bank’s Doing Business rankings or 81st on the Global Competitiveness rankings • Challenging competition after July 1 with many of the world’s best nations for doing business.

  10. What To Do – Fiscal Consolidation • Need to regain the investment credit rating before the capital market deteriorates (again) • Interest payments at 3% of GDP already at the capital spending level • Expenditure-based consolidation remains a priority – public spending at around 45% of GDP as opposed to 40% of GDP of EU10 • Fiscal space exists in the area of the wage bill, subsidies and consumption • Social spending requires redistribution from categorical to targeted social programs and a separation from contribution-based benefits from categorical benefits • Capital spending needs to be EU-funded and to take into consideration future maintenance cost

  11. What To Do – Investment Climate • Strengthen the business environment in the areas of: insolvency proceedings; issuance of construction permits; registering property; and transparency of related-party transactions. • Open up the network industries such as energy, railways, postal services and telecoms to competition to deliver better services at better prices for business and citizens. • Deepen the governance reform in the areas of: e-governance, performance-based public sector pay; territorial reorganization; review business necessity of quasi-fiscal institutions Source: World Bank Time/Cost Disclosure

  12. What To Do – Labor Market and Social Sectors • Demand and supply side issues, no quick wins: • EPL still highly rigid in stimulating employment and accelerating restructuring • Skill mismatches • Low labor participation • Which reforms: • Increasing hiring flexibility (a good set of proposals submitted by the government) • Reducing rigidity of collective firing • Improving VET education and providing incentives for LLL • Reducing incentives for early retirement, consolidating social benefits and improving their targeting

  13. What To Do - EU Funds • July 1, 2013 Croatia Becomes 28th EU Member State • EU Structural Funds: • 1.2% of GDP available for absorption in 2013 or 0.8% of GDP in payments. • Around 3.5% of GDP per year over the next programming period in commitments • Ease the external balance position and improve debt sustainability • What needs to be done? • Create fiscal space in the order of 1 percent of GDP per year as counterpart funds and for pre-financing • Develop sector and regional development strategies linked to sustainable fiscal frameworks

  14. Thank youwww.worldbank.hr

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