VZCZCXYZ0001
PP RUEHWEB

DE RUEHVB #0032 0221050
ZNR UUUUU ZZH
P 221050Z JAN 09
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 8939
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS ZAGREB 000032 
 
SIPDIS 
 
DEPARTMENT FOR EUR/SCE, EEB/IFD/OMA AND EEB/EPPD, TREASURY 
FOR OASIA LARRY NORTON 
 
E.O. 12958: N/A 
TAGS: EFIN ETRD ECON HR
SUBJECT: EARLY YEAR-END NUMBERS CONFIRM WEAKENING CROATIAN 
ECONOMY 
 
REF: A. ZAGREB 20 
     ¶B. 2008 ZAGREB 872 
 
¶1.  SUMMARY: Year-end figures confirm a slowdown in the 
Croatian economy. In the third quarter of 2008, GDP grew at 
its slowest pace in eight years, rising just 1.6 percent 
above its level in the third quarter of 2007. Retailers saw 
decreased sales in the second half of 2008, prompting 
significant job cuts should sales continue to slump into 
early 2009. Other businesses are now being hit by the Russian 
gas cutoff and a new law prohibiting most retailers from 
operating on Sunday. The most optimistic forecast for GDP 
growth in 2009 is now 1 percent, while some analysts say 
Croatia is facing recession. End summary. 
 
¶2.  Data released in the last days of 2008 and the first 
weeks of 2009 confirm that the effects of the global 
financial crisis have reached the Croatian economy. Exports 
dropped and demand waned in the third quarter of 2008, 
helping to slow GDP growth to its slowest pace in eight 
years. GDP for the third quarter of 2008 was just 1.6 percent 
higher than in 2007, compared to 5.1 percent growth in 2007 
over 2006. In November, the global economic turmoil helped to 
shrink Croatia's trade deficit as demand for imports dropped 
faster than exports. For the year 2008 as a whole, however, 
the current account deficit widened to more than 10 percent 
of GDP. The turmoil also hit the Zagreb Stock Exchange. With 
a 67 percent decline in share values, investors have 
proclaimed 2008 the worst year ever for the 17-year-old 
exchange. 
 
¶3.  Retail sales turnover showed negative growth for much of 
the second half of 2008. The latest figures show that in 
November, retail sales were 11 percent lower than in October 
2008, and 4 percent lower than in November 2007. The first 
week of January brought announcements of job cuts from 
retailers, banks and other sectors. The largest job losses 
were in the retail sector, due not only to the economic 
downturn but also to a new law banning most stores from 
opening on Sundays outside the Christmas and tourist seasons. 
 Many retailers, as well as the opposition Social Democratic 
Party (SDP), have called for the government to revise or 
suspend the Sunday shopping ban, and several major retail 
chains have said they will file a lawsuit challenging its 
constitutionality. 
 
¶4.  On top of these economic troubles, the cut in natural gas 
supplies due to the Russian-Ukraine dispute has forced many 
businesses to decrease or stop operations (reftel A). The GOC 
has not determined the total number of firms affected or 
estimated the extent of the damage. Press reports, however, 
say several hundred firms have been affected. A 
representative of the Croatian Employers Association (HUP) 
told one daily paper the damage could reach 1 billion EUR 
($1.3 billion) and deal "a final blow" to manufacturing in 
these already difficult circumstances. 
 
¶5.  At the end of December, the Croatian National Bank 
lowered its forecast for 2009 GDP growth from 2 percent to 1 
percent (reftel B). Some private analysts are even less 
optimistic and have started to offer warnings of recession. 
An analyst with Raiffeisen Consulting told the press that 
fourth quarter data for 2008 could show negative GDP growth, 
and that 2009 could see as much as a 0.6 percent decline in 
GDP.  GDP growth at these levels also could affect the 
government's 2009 budget, which assumes 2 percent growth in 
GDP.  Early fiscal data for 2009 have not been promising. A 
leaked Ministry of Finance report showed budget revenues for 
the first two weeks of 2009 63 percent down from the same 
period last year. Minister of Finance Ivan Suker said last 
week that the government is not considering revising the 
budget at this point and intends to wait until data for the 
first several months of the year are available. According to 
press reports, however, Sanader's advisory Economic Council 
intends to propose budget revisions already at a session on 
January 23. 
 
¶6. COMMENT: While Croatia successfully avoided fears of an 
immediate financial collapse last fall, and has won 
international praise for its sound monetary policies, the new 
data confirm fears that there will be significant pain to 
come. Expectations for the economy are now so low that even 
modest success in any sector will likely be lauded as a 
significant victory in the dim climate. With local elections 
looming in May, the government will be looking hard for any 
success to point to as it gears up for the campaign.  END 
COMMENT. 
BRADTKE