Newsletter article

Currency Report - March 2014

If Croatians were under the impression that EU membership would confer an instant and dramatic economic recovery upon the country they must by now have realised their error. Whatever the benefits of the union - and they are many - they do not include an economic magic wand, as Ireland, Greece and others know to their cost. Croatia's economy continues to struggle.

The Bureau of Statistics recently reported an eighth successive quarter of falling output as gross domestic product shrank by -0.4% in Q4 2013. In the last five years the Croatian economy has expanded in only two of the 20 quarters, in the middle of 2011. The balance of trade is similarly troubled; in the first 11 months of last year imports and exports both fell but exports declined more than three times as quickly as imports, widening the trade deficit. Unemployment is up at 22.4%, not as high as Spain but the highest reading in Croatia for at least five years.

The brightest beacon of hope is tourism, where the annual number of overnight stays has increased steadily for more than six years. Of those hotel guests 92% were from outside Croatia last year. If they have in mind to return in 2014 they are unlikely to find fault with the exchange rate. On average in 2013 one euro would buy 7.6 kuna and one pound sterling would buy 9.0 kuna. Eight weeks into the not-so-new year those exchange rates are up to 7.7 and 9.3 and the trend is pointing higher.

From those numbers it is clear that in the last 14 months the pound has strengthened against the euro by more than the euro has risen against the kuna. The Croatian National Bank continues to keep its currency steady against the euro but it must be said that the strategy now looks more like one of managed retreat than of absolute stability. The kuna is roughly 1% lower against the euro than a year ago and 1.5% below its position twelve months before that. In absolute terms, however, it is still remarkably steady against the euro.

Sterling's performance over the last month has been less impressive than in the first four weeks of the year. The pound is all but unchanged against the euro over the latest period and is lower on average by -0.6% against the world's dozen most actively-traded currencies. It is firmer by 1% against the kuna, having risen from 9.22 to 9.31.

The outlook is not markedly different from a month ago. The UK economy continues to outperform Euroland and sterling monetary policy is likely to result in higher interest rates in spring 2015 if the recovery remains on track. The euro zone picture is at last beginning to improve but there is lingering concern about falling consumer prices. It is possible that the European Central Bank may have to do something to stop those prices falling and any such action would be likely to weigh on the euro. Whilst nothing is ever assured in the FX market, it still looks likely that the pound will continue to edge higher against the euro and the kuna.

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