Domestic demand is still restrained by the continuing corporate and household deleveraging, while export growth is failing to provide a more significant boost for economic recovery due to an insufficiently strong export base, the analysts said.
Such developments are keeping unemployment high, with a drop in prices of imports and weak domestic demand resulting in negative inflation rates.
Against the background of these conditions, the HNB is continuing its expansive monetary policy with the aim of improving financing conditions for domestic businesses, while maintaining its policy of a stable kuna-euro exchange rate.
At the same time, the government has launched a fiscal adjustment programme in an effort to bring about a more significant change in negative economic trends by making public finances sustainable in the long run, the analysts said.
Following mild growth in early 2014, economic activity in the second quarter dropped 0.3% from the previous quarter. The drop was due to a decline in all components of aggregate demand, notably investment. Available monthly data indicates stagnation in the third quarter, due to a decline in the industrial sector, construction and trade, with positive developments having been recorded in tourism.
The number of workers stagnated in the second quarter compared to the previous quarter, and relatively favourable movements continued in the third quarter as well. However, data in a business optimism survey reveals a likely new drop in the number of workers in the months ahead.
Even though the registered unemployment rate dropped significantly in August owing to job-seekers being removed from the national employment agency's register at an increased rate, in July and August it stood at a relatively high 19.3%, the analysts warned.
The nominal and real gross salaries dropped in Q2 compared to the previous quarter, while in July and August they rose slightly.
Inflation has remained at slightly negative levels since February, and in August it was -0.3%. Deflation pressures were generated mostly by a drop in prices of imports, notably prices of food commodities and oil on the world market, as well as by weak domestic demand and tighter competition following Croatia's accession to the EU.
The current balance of payments surplus recorded since the start of the year declined in Q2 owing to expenditures related to payments into the EU budget and a drop in revenues from transactions from abroad. Expenditures related to foreign ownership investments increased, reflecting higher profits of foreign-owned companies and banks.
On the other hand, foreign trade has seen positive movements, primarily owing to commodities exports growing faster than imports.
Financing costs in the first and second quarters continued to improve mildly for domestic sectors owing to very high liquidity on domestic and foreign financial markets. Interest on state treasury notes has been at the lowest level since the outbreak of the crisis, and interest on domestic corporate and household loans has continued to decline mildly (except for interest on housing loans).
Nonetheless, household deleveraging has continued and at the end of the second quarter and the first two months of the third quarter it was also recorded in the corporate sector, notably public companies.
The fiscal deficit in the first half of 2014 was lower than in the same period of last year owing to the implementation of measures under the Excessive Deficit Procedure and a changed dynamic of loan repayment in the health sector. The total fiscal consolidated general government deficit in H1 was HRK 10.5 billion, HRK 2.2 billion less than last year. Data for the central government for July indicates an increase in the deficit for the remainder of the year.
The public debt in late June was 68.9% of GDP, the HNB analysts said.
(EUR 1 = HRK 7.64)