At the annual press briefing held today, Governor of the Croatian National Bank Boris Vujčić presented macroeconomic projections for 2023. As a member of the Eurosystem, the Croatian National Bank will twice a year participate in the preparation of the Eurosystem staff broad macroeconomic projection, based on a set of common assumptions. The CNB has already participated in the recently completed December cycle of the Broad Macroeconomic Projection Exercise (BMPE) with its projection of domestic macroeconomic developments, which has been included in the aggregate macroeconomic projections for the euro area. The broad Eurosystem staff projections are presented twice a year (in mid-June and mid-December) by the President of the European Central Bank. The CNB Governor will then inform the Croatian public of the macroeconomic projections for Croatia and key projections for the euro area. In addition, the CNB will inform the public of decisions and announcements regarding future actions of the Governing Council of the European Central Bank, to be joined by the CNB Governor as of January 2023.
In the first half of 2022, the Croatian economy successfully withstood the impacts of the hikes in the prices of raw materials and energy products and the disruptions in the global supply chains due to the Russian invasion of Ukraine, accompanied by the tightening of monetary policies of many central banks and a deterioration in global financing conditions. However, in the second half of the year, these factors have started to increasingly affect domestic economic activity. Despite strong foreign demand in the services sector, the Croatian economy recorded a slight contraction in the third quarter of 2022 from the previous quarter, while the annual growth rate of real activity slowed to 5.2%. In the light of historical results and the estimates for the fourth quarter of the current year, projecting a further slowdown in economic dynamics, real GDP could increase by 6.3% in the whole of 2022. Real GDP growth might decelerate sharply to 1.4% in 2023, due to a weaker growth of foreign and domestic demand exposed to the negative effects of geopolitical instability and the relatively elevated projected inflation. Total Croatian exports are expected to decrease slightly in 2023 on an annual level, with personal consumption and investments losing momentum.
Consumer price inflation might accelerate sharply to 10.6% in the whole of 2022 (measured by the euro area harmonised index of consumer prices). The rise in prices is largely the result of surges in the prices of energy products and food and industrial raw materials in the world market, further reinforced by the pressures arising from protracted global supply bottlenecks. Inflation acceleration was also driven by the strong demand for services following the lifting of containment measures, amid the lack of qualified labour force and the rise in wages in the hotels and restaurants sector. By contrast, inflation growth was somewhat muted because of restrictions on the prices of some energy products and basic food products. A considerably higher inflation in Croatia compared to that in the euro area stems from a sharp increase in non-resident demand for tourist services, stronger economic recovery, lower competition in the domestic market and differences in the consumer basket structure arising from the larger share of food and accommodation services’ prices in 2022. Inflation is expected to slow down to 7.5% in 2023. Such expectations are based on the further easing of current inflationary pressures, attributable to the expected further fall in the prices of crude oil and other raw materials, and the waning of the statistical effect of the sharp increase in the prices of numerous goods and services in 2022.
With regard to euro area projections, real GDP might grow by 3.4% in the whole of 2022 and is expected to slow down markedly to only 0.5% in 2023. The turn of the year might witness a relatively short-lived recession. As in the case of Croatia, the projected economic dynamics in the euro area is primarily shaped by the developments in the global environment, the ongoing energy crisis, elevated uncertainty and tighter financing conditions.
The Eurosystem staff expects that the average inflation in the euro area might come to 8.4% in the upcoming year. Inflation projections have been revised up substantially over the remainder of the projection horizon. Accompanied by significant negative risks, HICP inflation is now projected to stand at 6.3% in 2023, and is expected to gradually decrease and return to its target value by the end of the projection horizon.
At its meeting held on 15 December 2022, the Governing Council of the European Central Bank decided to raise key interest rates by 50 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 2.50%, 2.75% and 2.00% respectively, with effect from 21 December 2022. The Governing Council also announced a further substantial rise in interest rates at a steady pace. The key factors that influenced the decision and the announcements made by the Governing Council last week include persistently high inflation and the expectations that it might remain above the target level throughout the projection horizon in the absence of additional monetary policy measures. The Governing Council also discussed the principles for normalising the Eurosystem balance sheet. From March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace, while flexibility will be applied in reinvesting the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP) until at least the end of 2024.