Inflation and counter-inflationary policy measures: The case of Croatia

Ströhm, Bernd Christoph Research Report Inflation and counter-inflationary policy measures: The case of Croatia IMK Study, No. 83-9 Provided in Cooperation with: Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation Suggested Citation: Ströhm, Bernd Christoph (2022) : Inflation and counter-inflationary policy measures: The case of Croatia, IMK Study, No. 83-9, Hans-Böckler-Stiftung, Institut für Makroökonomie und Konjunkturforschung (IMK), Düsseldorf, https://nbn-resolving.de/urn:nbn:de:101:1-2023011911271267682770 This Version is available at: https://hdl.handle.net/10419/270351 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ STUDY No. 83-9 • December 2022 • Hans-Böckler-Stiftung INFLATION AND COUNTER-INFLATIONARY POLICY MEASURES: THE CASE OF CROATIA Bernd Christoph Ströhm1 ABSTRACT This national case study will investigate recent inflationary developments in Croatia by combining quantitative analysis with a qualitative overview of policy making. It collects data regarding inflationary developments, wages and other key variables in Croatia’s economy. The task of this study is to lay out wage and price developments within the country and to demonstrate structural aspects of inflation in light of post-covid recovery, supply-chain disruptions, and Russia’s military invasion of Ukraine, causing surging inflation rates across Europe. To demonstrate the development of nominal wages, prices and corporate mark-ups, this study will utilise data by Eurostat and the Croatian Bureau of Statistics. In addition to researching inflationary developments, this study shall also analyse policy making and the evolution of policies by the government, aimed at tackling inflationary pressure in Croatia, including measures to support businesses and local households in managing surging energy costs. Croatia’s energy dependency and its role as potential energy hub for the Western Balkan region shall be illustrated as well. Furthermore, this study describes the structure of Croatia’s labour market and reflects wage negotiations between trade unions and the government. ————————— 1 Vienna Institute for International Economic Studies WIIW and University of Vienna Seite 1 von 15 INFLATION AND COUNTER-INFLATIONARY POLICY MEASURES: THE CASE OF CROATIA Bernd Christoph Ströhm1 Abstract This national case study will investigate recent inflationary developments in Croatia by combining quantitative analysis with a qualitative overview of policy making. It collects data regarding inflationary developments, wages and other key variables in Croatia’s economy. The task of this study is to lay out wage and price developments within the country and to demonstrate structural aspects of inflation in light of post-covid recovery, supply-chain disruptions, and Russia’s military invasion of Ukraine, causing surging inflation rates across Europe. To demonstrate the development of nominal wages, prices and corporate mark-ups, this study will utilise data by Eurostat and the Croatian Bureau of Statistics. In addition to researching inflationary developments, this study shall also analyse policy making and the evolution of policies by the government, aimed at tackling inflationary pressure in Croatia, including measures to support businesses and local households in managing surging energy costs. Croatia’s energy dependency and its role as potential energy hub for the Western Balkan region shall be illustrated as well. Furthermore, this study describes the structure of Croatia’s labour market and reflects wage negotiations between trade unions and the government. This study is part of a series produced jointly by Macroeconomic Policy Institute (IMK) and the Austrian Chamber of Labour Vienna (AK Wien). Editorial responsibility for this report: AK Wien. 1 Vienna Institute for International Economic Studies WIIW and University of Vienna Seite 2 von 15 Price developments The EU annual inflation rate surged to 10.1% year-on-year in August 2022, the new highest level since the EU’s statistical office began compiling inflation data. The lowest annual rates were recorded in France (6.6%), Malta (7.0%) and Finland (7.9%). the highest annual rates were recorded in Estonia (25.2%), Latvia (21.4%) and Lithuania (21.1%) (Eurostat 2022b). The average growth of consumer prices in Croatia amounted to 12.3% year-on-year in the month of August. This figure was higher than the euro area average, due to the country’s stronger recovery from the COVID-19 pandemic in 2021 paired with the surge of processed food prices. Observing the structure of Croatia’s consumer price indices, processed food contributes 22.5% in the growth rate of consumer prices (Croatian Bureau of Statistics 2022f). Figure 1: Consumer Price Index (annual rate of change, %) Source: Croatian Bureau of Statistics 2022f, PX-Web - Select variable and values (dzs.hr) Looking at the main components of euro area inflation in the month of August (Figure 2), energy had the highest annual rate, with 38.6%, followed by food, alcohol and tobacco, with 10.6%, non-energy industrial goods, with 5.1%, and services, with 3.8%. -2% 0% 2% 4% 6% 8% 10% 12% 14% Jan.2002 Jan.2003 Jan.2004 Jan.2005 Jan.2006 Jan.2007 Jan.2008 Jan.2009 Jan.2010 Jan.2011 Jan.2012 Jan.2013 Jan.2014 Jan.2015 Jan.2016 Jan.2017 Jan.2018 Jan.2019 Jan.2020 Jan.2021 Jan.2022 Consumer Price Index (annual rate of change) Seite 3 von 15 Figure 2: Euro area annual inflation and its main components, August 2012 – October 2022 Source: Eurostat 2022c The Croatian Bureau of Statistics recorded that in August 2022, producer prices of industrial products had increased by 22.6% as compared to August 2021, the lowest rate since April 2022. The decline can be explained due to a further decrease in energy prices between July (87.2%) to August (79.2%). In the EU, industrial producer prices surged by 37.8% year-on-year in the month of July. According to the main groups of the ECOICOP classification, the highest increase in average consumer prices in August was recorded in food and non-alcoholic beverages, by 19.2%. Prices in hotels and restaurants increased by 17.6% year-on-year in August, while prices in transport goods and services also surged by 14.1% due to increased energy costs as a result of the war in Ukraine. In selected groups, the highest surge in consumer prices at the annual level was recorded in the group of processed food, with 17.8%. The largest contribution to the consumer prices growth rate was recorded in the group of food and non-alcoholic beverages (+4.98 pp), followed by transportation (+2.08 pp), housing, water, electricity, gas and other fuels (+1.77 pp), restaurants and hotels (+0.88 pp), furniture, home equipment and regular household maintenance (+0.87 pp), recreation and culture (+0.50 pp), and clothing and footwear (+0.37 pp) (Croatian Bureau of Statistics 2022f). Price growth in the service sector was spurred in particularly by increased tourist consumption following the COVID-19 pandemic, which created pressure on the demand side. -20% -10% 0% 10% 20% 30% 40% 50% Aug.2012 Aug.2013 Aug.2014 Aug.2015 Aug.2016 Aug.2017 Aug.2018 Aug.2019 Aug.2020 Aug.2021 Aug.2022 All-items HICP Food including alcohol and tobacco Industrial goods Energy Services (overall index excluding goods) Seite 4 von 15 Figure 3: Inflation rate for bread in the EU Source: Eurostat 2022d The price of bread (Figure 3) increased by 31%, making Croatia one of five countries in the EU with the highest surge in bread prices. Hungary tops the ranking, with bread prices surging by 65%, followed by Lithuania, Estonia, Slovakia, and Croatia. According to forecasts by the Croatian Central Bank, inflation will surge to 9.4% this year and to 4.6% in 2023. Persisting global supply chains disruptions and higher energy prices will exert upward pressure on inflation, which is why double-digit growth rates will persist in Q3 2022. Croatia plans to introduce the euro in January 2023. The kuna will be converted to the euro at an exchange rate of HRK 7.53 – the current HRK central rate in the European Exchange Rate Mechanism (ERM II). Shops will begin displaying prices in both kuna and euros from September 2022. According to study by the Croatian Central Bank conducted in 2017, price increases within Croatia during the euro adoption period could be triggered by spillover effects of conversion costs onto local households. Nevertheless, the effects of the euro adoption on the increase in consumer prices is expected to be mild. The Central Bank estimated that the effect of conversion in Croatia may result to a 0.20% increase in the country’s consumer price index in the period of six month prior to and after euro adoption (Pufnik 2017, 9). Wage developments Croatia has a population of 3.8mn inhabitants according to the 2021 census. The average nominal gross monthly wage in Croatia stood at EUR 1,275 (HRK 9,569). This is significantly higher than in the countries of the Western Balkan region – Serbia had an average wage of EUR 870 (RSD 102,196), BiH an average wage of EUR 793 (BAM 1,552). In Montenegro, gross monthly wages also stood at EUR 793. Still, Croatia was at the bottom of the salary list among the EU countries in 2021, with only Bulgaria, Romania and Hungary having a lower salary (Eurostat 2022a). 0% 10% 20% 30% 40% 50% 60% 70% Hungary Lithuania Estonia Slovakia Croatia Latvia Poland Bulgaria Czechia Romania Greece Cyprus Slovenia EU - 27 Germany Spain Denmark Portugal Ireland Sweden Belgium Italy Malta Iceland Finland Austria Luxembourg Netherlands France Norway Switzerland Seite 5 von 15 In Q2 of 2022 the working-age population (aged 15 to 64) stood at 2.5mn people, out of which 1.7mn people were employed. The number of unemployed persons in Croatia amounted to 134,000 people (Croatian Bureau of Statistics 2022a). Total labour costs per hour in Croatia in 2021 averaged to EUR 11.20, roughly the same as in Poland, with EUR 11.50. In Slovenia, total labour costs per hour amounted to EUR 21.10. Compared to other EU countries, Croatia also stood at the bottom list of total labour costs, with only Latvia, Bulgaria, Romania, and Hungary having lower costs (Eurostat 2022e) Since 2008, labour costs have increased by a nominal 21.7% in Croatia (Lichter and Buhin Peharec 2022a). According to the European Commission’s 2022 Convergence Report, Croatia’s tight labour market and continued wage growth will result in a slight rise in nominal unit labour costs in 2022 and 2023 (European Commission 2022, 19). The average nominal net monthly wage in Croatia in 2021 stood at EUR 945 (HRK 7,129). The median wage in the month of December 2021 stood at EUR 813 (HRK6,131), meaning that 50% of the workers earn less than EUR 813, and that the average wage is skewed towards the right of the wage distribution, and is not representative of what majority of the workers earn (Croatian Bureau of Statistics 2022b). According to the Croatian State Statistics Bureau, there are notable differences in the wages between the different regions in Croatia. The highest average monthly net earnings per person in employment for Q4 2021 are paid in the City of Zagreb, amounting to EUR 1.147 (HRK 8,639), second highest wages were paid in the Zagreb County, with EUR 973 (HRK 7,339). The lowest wages were paid off in the Virovitica-Podravina County, amounting to EUR 820 (HRK 6,188) and in the Vukovar-Sirmium county, with EUR 839 (HRK 6,328) (Croatian Bureau of Statistics 2022b). Figure 4: Croatian counties Source: Wikimedia Commons, 2010 Zagreb Krapina- Zagorje Sisak-Moslavina Karlovac Varaždin Koprivnica-Križevci Bjelovar- Bilogora Primorje- Gorski Kotar Lika-Senj Virovitica- Podravina Požega- Slavonie Brod - Posavina Zadar Osijek-Baranja Šibenik- Knin Vukovar- Syrmie Split- Dalmatie Istrie Dubrovnik- Neretva Medjimurje Grad Zagreb Seite 6 von 15 It is noticeable that there is a wage gap between the public and private sectors. An analysis by the Croatian FINA finance agency from 2018 showed that state-owned companies paid 34% higher net salaries than the private sector in 2016 (excluding financial institutions). Croatia introduced a minimum wage in 2008, which stood in 2022 at EUR 624 (HRK 4,687) gross per month for full-time employees. In 2021, the government decided that it would increase minimum wages within Croatia by 10.3%, to EUR 500 (HRK 3,750) from 1 January 2022 (Government of the Republic of Croatia, 2021). Despite the relatively high increase, the spill-over to other wages has been rather small (Lichter and Buhin Peharec 2022b). According to the MojaPlaca (MyWages) service, wages within Croatia have only grown by a 4% year-on-year in the first eight months of 2022. Just over a quarter of Croatian employees (28%) received a raise in 2022 (Poslovni dnevnik 2022). The Labour Ministry established a task force in September and launched negotiations aimed at increasing minimum gross wages by 11.9%, from EUR 621 (HRK 4,687) to some EUR 696 (HRK 5,246) in 2023. Trade unions called on the government to increase minimum wages to at least EUR 700 (HRK 5,259) from 2023 due to surging inflation. Croatian Prime Minister Plenkovic announced in October 2022 that the government would raise Croatia’s minimum legally mandated net salary to EUR 561 (HRK 4,220) in 2023, about a 12% increase from the current EUR 500 (HRK 3,750) (Government of the Republic of Croatia 2022d). Figure 5: Average monthly gross earnings in Croatia, 2011-2021 Source: wiiw database According to the Croatian state statistics bureau, average net monthly salary in Croatia grew by 7.5% in nominal terms year-on-year in the month of June 2022. However, this was 4.1% down in real terms, as the statistic’s bureau cited a level of inflation of 12% year-on-year in June (Croatian Bureau of Statistics 2022d). In July, the highest average wages were paid in air transport services, with EUR 1,620 (HRK 12,202), in consultancy, computer programming, and related services, with EUR 1,549 (HRK 11,685), in processing activities of crude petroleum and natural gas, with EUR 1,528 (HRK 11,528) and in information service activities, with EUR 1,497 (HRK 0 200 400 600 800 1000 1200 1400 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 EUR Average monthly gross wages total EUR Seite 7 von 15 11,296). The lowest earnings were paid off in other personal service activities, with EUR 662 (HRK 4,986) and in manufacture of wearing apparel activities, with EUR 665 (HRK 5,022) (Croatian Bureau of Statistics 2022e). In the January-July 2022 period (Table 1), the average monthly net wage paid by legal entities amounted to EUR 1,005 (HRK 7,569), which is 6.9% more in nominal terms compared to the same period of 2021, and 2.1% less in real terms. The nominal wage growth between 2020 and mid-2022 can be attributed to the government’s employmentstate aid measures and personal income tax cuts. Table 1: Average monthly net and gross earnings for July 2022 VII 2022 I – VII 2022 Indices VII 2022 VI 2022 VII 2022 VII 2021 I – VII 2022 I – VII 2021 Net earnings Average monthly paid off net earnings per employee, kuna 7,576 7,569 98.2 107.5 106.9 Real net earnings per employee 97.8 95.7 97.9 Gross earnings Average monthly gross earnings per employee, kuna 10,306 10,277 98.2 108.6 107.9 Real gross earnings per employee 97.8 96.7 98.8 Net earnings per hour Average paid off net earnings per hour, kuna 44.18 43.46 102.2 112.1 107.3 Real net earnings per hour 101.8 99.8 98.3 Gross earnings per hour Average monthly gross earnings per hour, kuna 60.10 59.01 102.2 113.2 108.3 Real gross earnings per hour 101.8 100.8 99.2 Source: Croatian Bureau of Statistics 2022e Croatia’s labour market is characterised by labour shortages in some occupations, partly due to emigration to other member states of the European Union. Rigid legal regulations in the Croatian labour law inhibit a quicker growth in average wages. Such regulations also hinder flexibility in employment: In 2021, only 13.5% of all Croatian employees had a fixed-term employment contract. Especially telework is far below the EU average: Only 3.1% of all employees were officially able to work from home in 2020 (EU average stood at 12.2%) (Lichter and Buhin Peharec 2022c). Seite 14 von 15 Government of the Republic of Croatia (2022c). €180m to be invested in Zlobin-Bos- iljevo gas pipeline and upgrade of LNG terminal. Available online at https://vlada.gov.hr/news/180m-to-be-invested-in-zlobin-bosiljevo-gas-pipeline-and- upgrade-of-lng-terminal/35931 (acessed at 29.11.2022) Government of the Republic of Croatia (2022d). In the time of crisis solidarity should be the main principal of the social cohesion. Available online at https://vlada.gov.hr/news/in-the-time-of-crisis-solidarity-should-be-the-main-princi- pal-of-the-social-cohesion/36272 (accessed 26.10.2022). Government of the Republic of Croatia (2021). Minimum wage to rise by 10.3% to €500 in 2022. Available online at https://vlada.gov.hr/news/minimum-wage-to-rise-by-10- 3-to-500-in-2022/33265#:~:text=Croatia's%20mini- mum%20wage%20for%202022,consultations%20with%20all%20social%20part- ners (accessed 18.10.2022). Lichter, Waldemar/Buhin Peharec, Snjezana (2022a). Kroatien: Lohnkosten. Germany Trade and Invest (GTAI). Berlin. Available online at https://www.gtai.de/de/trade/kroatien/wirtschaftsumfeld/lohnkosten-229232 (accessed 29.11.2022) Lichter, Waldemar/Buhin Peharec, Snjezana (2022b). Lohn- und Lohnnebenkosten - Kroatien. Germany Trade and Invest (GTAI). Berlin. Available online at https://www.gtai.de/de/trade/kroatien/wirtschaftsumfeld/lohn-und-lohnnebenkosten- kroatien-229212#:~:text=Kroatien%20hat%20seit%202008%20einen,Prozent%20des%20Mindestlohns%20nicht%20unterschreiten (accessed 29.11.2022) Lichter, Waldemar/Buhin Peharec, Snjezana (2022c). Kroatien: Arbeitsmarkt. Germany Trade and Invest (GTAI). Berlin. Available online at https://www.gtai.de/de/trade/kroatien/wirtschaftsumfeld/arbeitsmarkt- 229216#:~:text=Rund%2013%2C5%20Prozent%20(2016,unterdurchschnittlich%20vertreten%20ist%20die%20Telearbeit (accessed 29.11.2022). Lozančić, Branko (2022). Companies with more than 300 million in revenue will be taxed at 33% on profits of more than 20%. Hrvatska radiotelevizija (HRT) from 17.11.2022. Available online at https://glashrvatske.hrt.hr/en/economy/companieswith-more-than-300-million-in-revenue-will-be-taxed-at-33-on-profits-of-more- than-20--10445091 (accessed 29.11.2022). Penić, Goran (2022). Ipak skuplja struja, cijena grijanja ide u nebo, doznali smo i koliko: ‘Vlada mora reagirati‘. Jutarnji list from 26.08.2022. Available online at https://www.jutarnji.hr/vijesti/hrvatska/ipak-skuplja-struja-cijena-grijanja-ide-u- nebo-doznali-smo-i-koliko-vlada-mora-reagirati-15239404 (accessed 26.08.2022). Poslovni dnevnik (2022). Porazno: Trećina radnika u Hrvatskoj nikada nije dobila povišicu. Poslovni dnevnik from 01.09.2022. Available online at https://www.poslovni.hr/hrvatska/porazno-trecina-radnika-u-hrvatskoj-nikada-nije- dobila-povisicu-4351779 (accessed 01.09.2022) Pufnik, Andreja (2017). Effects of the Adoption of the Euro on Consumer Prices and Inflation Perceptions: An Overview of Experiences and Assessment of the Possible Impact in Croatia. Croatian National Bank. Zagreb. Surveys S-27. Available online at https://www.hnb.hr/documents/20182/2070704/s-027.pdf/d995baa4-fab7-4417- bb67-3c463cfa24cc (accessed 29.11.2022). Radosavljevic, Zoran (2022). Croatia’s sole gas storage at 90%, PM says. Euractiv from 30.09.2022. Available online at https://www.euractiv.com/section/energy-envi- ronment/news/croatias-sole-gas-storage-at-90-pm-says/ (accessed 29.11.2022) Simmonds, Lauren (2022). Unions Want Croatian Public Sector Wages to Match Inflation Rate. Total Croatia News from 05.07.2022. Available online at https://www.total-croatia-news.com/business/64115-croatian-public-sector (accessed 29.11.2022). Seite 15 von 15 Total Croatia News (2022). Government Recommends Heating Temperature Of 21 °C, Cooling Temperature Of 25 °C. Total Croation News from 28.07.2022. Available online at https://www.total-croatia-news.com/politics/64637-government-recommends-heating- temperature-of-21-c-cooling-temperature-of-25-c (accessed 29.11.2022). Vlada Republike Hrvatske (2022). (2022, February 16). Predstavljen paket mjera za ublažavanje rasta cijena energenata vrijedan 4,8 milijardi kuna. Vlada Republike Hrvatske from 16.02.2022. https://vlada.gov.hr/vijesti/predstavljen-paket-mjera-za- ublazavanje-rasta-cijena-energenata-vrijedan-4-8-milijardi-kuna/33907 (accessed 29.11.2022) Wikimedia Commons: Counties of Croatia (2010, July 22). https://commons.wikimedia.org/wiki/File:Counties_of_Croatia-fr.svg Imprint Publisher Macroeconomic Policy Institute (IMK) of Hans-Böckler-Foundation, Georg-Glock-Str. 18, 40474 Düsseldorf, Germany, phone +49 211 7778-312, email [email protected] IMK Study is an irregular online publication series available at: https://www.imk-boeckler.de/de/imk-studies-15380.htm The views expressed in this paper do not necessarily reflect those of the IMK or the Hans-Böckler-Foundation. ISSN 1861-2180 This publication is licensed under the Creative commons license: Attribution 4.0 International (CC BY). Provided that the author's name is acknowledged, this license permits the editing, reproduction and distribution of the material in any format or medium for any purpose, including commercial use. The complete license text can be found here: https://creativecommons.org/licenses/by/4.0/legalcode The terms of the Creative Commons License apply to original material only. The re-use of material from other sources (marked with source) such as graphs, tables, photos and texts may require further permission from the copyright holder.