eu11 regular economic report
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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
Sour labor market developments, Croatia, in % Less opportunities (or incentives) even in the informal sector
Source: CROSTAT, World Bank staff calculations
External Debt (% of GDP) CAD and Net FDI (% of GDP)
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
Source: CNB, CROSTAT, World Bank staff calculations
Public Debt and Deficit (% of GDP)
Public Debt on Rise Stronger fiscal consolidation required,
especially on the expenditure side 2013 plans hardly achievable
Note: Fiscal deficit assessed for 2008-2011 as per the required ESA95 coverageSource: MOF, CROSTAT, World Bank staff calculations
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
Some Softening of the Labor Market
Source: CROSTAT, HZZ, World Bank staff calculations
However, Structural Problems Deepened
Labor market entry for youth particularly constrained
Source: CROSTAT, HZZ, World Bank staff calculations
Job destruction in industry continued; public sector employment dominated
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.
What To Do – Fiscal Consolidation
10
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
What To Do – Investment Climate
11Disclosure
Time/Cost
• 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
What To Do – Labor Market and Social Sectors
12
Demand and supply side issues, no quick wins: EPL still highly rigid in stimulating employment and
accelerating restructuring Skill mismatches Low labor participationWhich 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
What To Do - EU Funds
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• 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
Thank you
www.worldbank.hr
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