Croatia reported its deepest-ever decline in GDP in 2Q20, attributed to the coronavirus (COVID-19) lockdown. The country is now seeing an upturn in new coronavirus cases, but the Croatian Employers Association (HUP) has warned the economy cannot withstand a second lockdown. 

Croatia’s GDP experienced a 15.1% year-on-year slump in the second quarter, the Croatian Bureau of Statistics (DZS) said on August 28. This is the deepest contraction since the DZS started publishing GDP data back in 1995 and dwarfs the 8.8% contraction reported during the international economic crisis in 2009. 

Finance Minister Zdravko Maric said the contraction was not a surprise given the coronacrisis, and added that the decline would have been even worse without the government’s economic stimulus measures, a government statement said. 

On the same day, the statistics office released retail data showing a 6.7% year-on-year drop in retail trade turnover in July, somewhat greater than the 6.2% y/y drop in June, despite the increased number of tourists holidaying in the country. 

There was, however, some positive news as the European Commission’s EU Economic Sentiment report, released the same day, showed that economic expectations in Croatia improved in August compared to the previous month.

International financial institutions (IFIs) had already forecast a substantial contraction in Croatia’s economy this year. 

They range from a GDP contraction of 7% forecast by the European Bank for Reconstruction and Development (EBRD) to as much as 10.8% forecast by the European Commission. The World Bank expects Croatia to have the worst affected economy in the emerging Europe region by the coronavirus pandemic, with a contraction of 9.3% forecast for this year. 

Raiffeisen said in a note published ahead of the data release on August 28 that it was standing by its earlier forecast of an 8.5% contraction in GDP. “All high-frequency indicators mirror extremely negative expectations amid the lockdown of economy during Q2 2020 and persistent uncertainty,” Raiffeisen analysts said.

The damage to the economy is not expected to be so bad in the third quarter. Croatia reopened to tourists in late May and early June, and data published by the Croatian National Tourist Board shows that number started to revive in July and especially August, with arrivals and overnight stays at well over half the 2019 level. 

The strong figures for July and August were influenced by large numbers of holidaymakers from Central European countries, for whom Croatia is easily accessible by road. There was actually a year-on-year increase in arrivals from key source markets such as Germany and Slovenia. There are also signs that West Europeans who normally choose exotic long-haul destinations were opting for holidays in countries such as Croatia that were seen as a safer option. 

The stronger than expected tourism season gave hope that Croatia might escape the depths of depression some observers forecast, though a substantial contraction is still expected for the full year 2020. 

After the peak summer months of July and August, Croatia usually continues to attract large numbers of tourists through September. This year, however, the season has come grinding to a halt as several countries including Slovenia and the UK have placed Croatia on their quarantine lists. Denmark was the latest to react, issuing an orange travel advisory for the country on August 27 and warning against non-essential travel.

In response, airlines including British Airways and easyJet have cut the number of flights to Croatia, while Croatia Airlines has reduced flights to the UK. Poland, meanwhile, says it will flights from 46 countries, including Croatia, from September 2, as reported by Reuters.

Croatia reported a record 358 new coronavirus (COVID-19) cases on August 26, and the number of new infections has remained high in recent days. The latest figures announced by the National Civil Protection Headquarters show that in the 24 hours to August 29 312 new coronavirus cases were recorded in Croatia, bringing the number of active cases to 2,654. 

Localised restrictions that fall short of a full lockdown have been introduced in the worst affected areas. In Split-Dalmatia County residents now have to wear masks in cafes and restaurants before consuming drinks and food, gyms have been closed, and weddings must have no more than 50 guests. 

General manager of HUP Damir Zoric urged the government to continue with measures to help the economy, in order to preserve jobs, ensure liquidity in the economy and encourage consumption and investment. 

“Today's data shows that the economy cannot withstand another lockdown,” said Zoric. 

“Without work or with a constant reduction in work activity, we lose more than we can currently bear. Given that a good portion of economic activity for almost two-thirds of the time during the second quarter was either completely halted, the limited drastic decline in GDP was expected,” he added. 

The HUP noted that the results of the tourism sector in July and August are better than previously expected, and pointed to growth in construction and the information and communication sector.

However, the statement added. “Although the decline in tourism is likely to be less than originally expected, the consequences of the pandemic crisis have not been resolved, on the contrary, it will deepen. It is difficult to expect more visible economic growth in the remainder of this year as well as in the first half of 2021.”