Country Report Croatia January 2009

Outlook for 2009-10

• The renewed mandate of the Croatian Democratic Union (HDZ) has contributed to a high degree of political continuity. However, the government will remain dependent on the support of smaller parties.
• There are few significant policy differences between this government and its predecessor, but the assertive line taken by the Croatian Peasants' Party (HSS) on agriculture and territorial issues could hinder EU-related progress.
• In the wake of several gangland-style murders, there will be continuing domestic and external pressure on the government to get to grips with the criminal underworld and enforce the rule of law.
• The Economist Intelligence Unit expects the government to adhere to an agenda of EU-mandated reforms, although the pace of these will be slow in politically sensitive areas, such as agriculture, fishing and steel.
• As much still needs to be done in accession negotiations, EU entry will not occur before 2011, and there is a risk to this date, because of uncertainty over the future of the EU's Lisbon treaty and the ongoing dispute with Slovenia.
• We forecast a slowdown in real GDP growth to an annual average of 2% in 2009-10, owing to reduced consumer spending and a weakening euro zone, which will have a negative impact on Croatia's exports and tourism earnings.
• The current-account deficit should contract to an average of 7.2% of GDP in2009-10.

Monthly review

• At the inter-governmental conference on December 19th 2008, Slovenian objections seriously hindered Croatia's EU accession negotiations.
• In addition to the stalling in EU negotiations and the economic downturn, the government has come in for further criticism for its proposed healthcare reforms and for not ensuring sufficient gas supplies.
• The release of estimate GDP figures for the third quarter confirms that the economy has come under increasing pressure, growing by only 1.6% year on tear in real terms.
• After a modest decline, of 0.7% year on year, in October, the downward trend in industrial production gathered strength in November, when a 3.5% year on year contraction was recorded.
• As in previous years, Croatia recorded a tourism-driven current-account surplus in July-September 2008, after substantial deficits in the first twoquarters.

Source: Country Report