October 7 (SeeNews) - The World Bank said on Wednesday it now expects the Croatian economic output to contract by 8.1% this year due of the COVID-19 pandemic, revising its previous forecast for a 9.3% contraction made in June.
The Croatian economy is expected to recover by growing 5.9% in 2021, higher than the previously projected 5.4% growth for next year, the World Bank said in its October 2020 Europe and Central Asia Economic Update report.
This year's contraction will come mainly as a result of Croatia's strong reliance on tourism, which is the sector most affected by the crisis.
"Although easing of border restrictions since June has significantly helped the tourism sector, it is still going to bear the brunt of the impact with more than 40 percent decline in export revenues compared to 2019," the World Bank said.
In addition, adverse economic state of Croatia’s main trading partners will weigh heavily on exports, while personal consumption and investment in the country are also expected to record a severe decline.
"Given fiscal expansion and falling economic activity, in 2020 Croatia is expected to register a fiscal deficit of close to 7 percent of GDP. This will temporarily reverse the downward trajectory of government debt which could by the end of the year reach almost 87 percent of GDP," according to the report.
Under the assumption of the pandemic being gradually brought under control, Croatia's gross domestic product (GDP) is expected to resume its growth next year, supported by a strong rebound in tourism revenues.
In such circumstances, the current account balance is also expected to return to surplus in 2021 after a temporary deficit in 2020, while the recovery of investments will be supported by inflow of EU funding.
Croatia's GDP fell by 7.8% in the first half of 2020, mainly as a result of a record annual decline of 15.1% in the second quarter, the World Bank noted.
"The largest negative contribution to growth came from external demand, amid wide-spread travel bans that affected Croatia’s large tourism sector and ancillary activities. Domestic demand also contracted significantly, with government consumption being the only demand side component to grow," the global lender said.
It added that the fiscal stimulus measures, together with falling economic activity have taken a heavy toll on government finances, with the central government deficit reaching its highest level on record in the first six months of the year.
"The crisis will affect working poor households, who have been disproportionately affected by unemployment. Low savings rate among these households limit their ability to mitigate the impacts of income loss on consumption. Even among those with savings, more than two-thirds would run out of savings within the next six months."
In addition, a decline in international remittances is expected to negatively affect income of recipients at home, the World Bank said, adding that the current safety net programs may not be sufficient to offset households’ total welfare losses given their limited financial space.