Country Report Croatia July 2009

Outlook for 2009-10

• The centre-right government led by the Croatian Democratic Union (HDZ) faces serious challenges in 2009-10, not least in maintaining its direction after the surprise resignation of Ivo Sanader as prime minister.
• In the wake of several gangland-style murders, there will be continuing domestic and external pressure on the government to combat organised crime and to enforce the rule of law.
• EU entry will not occur before 2011. There is a risk even to this date, because of uncertainty over the future of the EU's Lisbon treaty and the ongoing border dispute with Slovenia.
• The Economist Intelligence Unit forecasts a 4% contraction in real GDP in 2009, owing to falling domestic demand and a weakening euro zone, which will hit Croatian exports and tourism. We forecast growth of just 0.2% in 2010.
• The kuna is expected to depreciate to an average of around HRK7.44:???1 in 2009, before regaining some ground in 2010.
• We forecast that average annual inflation will decline to 2.8% in 2009 and to 2.6% in 2010.
• The current-account deficit is forecast to narrow to around 6% of GDP in 2009 and 5.6% of GDP in 2010.

Monthly review

• In the second round of the local elections in May the ruling HDZ and its coalition partners, which had maintained control of most counties in the first round, lost out in the main urban mayoral contests.
• Tensions flared briefly in June between the HDZ and another member of the ruling coalition, the Croatian Peasants' Party (HSS), over support for farmers.
• In June Croatia's government concluded negotiations with the European Commission regarding the privatisation of six state-owned shipyards.
• In the first quarter of 2009 the central government budget saw a year-on-year drop in revenue and a 10.6% increase in expenditure. Tax revenue fell year on year by about 17%.
• In May consumer price inflation slowed to 2.7% year on year.
• Industrial output contracted by 7.3% year on year in May, following a 7.1% drop in April. Retail sales were 14.5% down in April year on year.
• The trade deficit in January-April 2009 was 34.7% lower year on year, amounting to ???2.5bn (US$3.4bn).

This report covers the following industry codes:
SIC Code: 49
NAICS Code: 22