During its session today, the CNB Council discussed current economic and financial developments and examined the latest trends in the banking system, macroeconomic and financial risks as well as monetary policy projections. The Council also adopted several decisions on matters falling within its competence.
Regarding current economic developments, immediate GDP shows that economic activity accelerated in the third quarter compared to the previous quarter, mainly due to a very good tourist season. Real GDP is expected to grow at an annual rate of 8.5% in 2021, driven by strong growth in exports of goods and services as well as domestic demand. Given that economic activity is already expected to reach pre-pandemic levels this year, the growth rate could slow to 4.1% in 2022. Strong growth in exports of goods and services is expected to continue and inflows. of EU funds will stimulate domestic demand. .
The development of the labor market remained positive: the number of employed people exceeded the pre-crisis level in mid-2021, while the number of unemployed remained slightly above this level. Employment is expected to grow each year and the unemployment rate is expected to decline in 2021 and 2022. Labor productivity growth and strong demand are expected to support continued wage growth, especially in dynamic segments of the economy. Annual consumer price growth accelerated from 2.8% in July to 3.1% in August, mainly due to accelerated annual growth in food prices. Core inflation also edged up in August, but remained relatively low at 1.8%. Consumer price inflation could temporarily accelerate from 0.1% in 2020 to 2.3% in 2021 due to an increase in the annual rate of change in energy prices, especially those of refined petroleum products. Inflation is expected to decline to 2.1% in 2022 due to the expected weaker growth in energy prices. However, inflation projections carry significant downside risks, indicating that inflation may be higher than expected.
Favorable trends in tourism and merchandise exports as well as strong EU inflows could push Croatia’s current account and balance of payments capital account surplus to 4% of GDP in 2021 and stay high the following year. The increase in the current account and capital account surplus supported the expansionary monetary policy, a trend that is expected to continue the following year. Banks’ free reserves reached HRK 62.4 billion in September, an increase of HRK 21.3 billion from the same month a year earlier. Despite still very favorable financing conditions, the granting of loans remained sluggish in all segments, with the exception of the home loans segment. The growth of loans to households continued to accelerate to reach 4.6% per year in August, but at a slower pace, due to the completion of the new cycle of subsidies for housing loans. Home loans have remained strong and general purpose cash loans are gradually picking up. In contrast, loans to non-financial corporations continued to stagnate at a slightly decelerating annual growth rate of 1.2% in August. The annual growth rate of total banks’ investments (excluding government investments) could slow to 3.4% in 2021, but is expected to pick up in 2022, especially for loans to non-financial corporations.
Total exposure to systemic risk increased from high to moderate at the end of the third quarter of 2021. The economic recovery has strengthened thanks to growing optimism from consumers and businesses, reducing short-term risks in the industry. non-financial. However, structural vulnerabilities, which increase the intensity of disruptions if an adverse shock materializes, remained accentuated. They mainly stem from the high level of public and external debt, the still high unemployment rate and low activity in the labor market as well as the relatively high debt of non-financial enterprises.
The main medium-term risks to financial stability include trends in the real estate market and the corporate sector. In view of the continued growth in real estate prices, it is very important to monitor developments in the home and real estate loan market and to ensure that prudent standards are maintained for the approval of loans in the market. whole system. In addition, a deceleration in business dynamics can have a negative impact on the performance of the business sector and its ability to mitigate potential shocks in the future, which also increases the risks to the financial sector. Another possible trigger for the materialization of risks in the non-financial corporations sector is the potentially significant worsening of the pandemic situation, with the slowdown or disruption of supply chains further weighing on macroeconomic developments.
Total assets of credit institutions increased by HRK 15.5 billion (3.4%) in the first half of 2021 to stand at HRK 478 billion, with most of the growth coming from an increase in financial assets. household current account deposits. As a result of this and a decline in nonperforming loans (NPLs), the quality of total exposure continued to improve and the share of NPLs in total loans decreased slightly from 5.4% to 5.1%. Loans that are not yet in default, but for which a significant increase in credit risk has been identified, halted growth. However, their maintenance at an increased level reflects an increase in credit risk compared to the pre-crisis period. Due to the absence of risky investments and the maintenance of the level of total capital, capital adequacy indicators have remained very high, with the banking system’s total capital adequacy ratio standing at 25 , 4%. At the end of the first half of 2021, credit institutions recorded a profit of HRK 2.6 billion, or HRK 0.9 billion (51.3%) more than at the end of the same period of the year. ‘last year. The increase in profit results from a clear decrease in impairments for bad debts and, to a lesser extent, from a slight increase in net operating profit. The profitability indicators have thus improved compared to the previous period: the ROA went from 0.8% to 1.1% and the ROE went from 5.6% to 8.1%.
Croatian National Bank published this content on October 13, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on October 15, 2021 10:11:00 AM UTC.