Country Report Croatia May 2009

Outlook for 2009-10

• The government now assumes that real GDP will fall by 2% in 2009. In its new budget, it assumes lower revenue and expenditure, although the budget deficit will be larger than previously targeted.
• In the wake of several gangland-style murders, there will be continuing domestic and external pressure on the government to combat organised crime and enforce the rule of law.
• As much still needs to be done in accession negotiations, 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 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 0.2% in 2010.
• The kuna will depreciate to an average of around HRK7.48:1 in 2009, before regaining some ground in 2010.
• We forecast that average annual inflation will decline to 2.6% in 2009 and to 2.5% in 2010.
• The current-account deficit is forecast to narrow to 5.7% of GDP in 2009 and 5.4% of GDP in 2010.

Monthly review

• The Croatian Democratic Union, which leads the centre-right government, ranks second to the Social Democratic Party in opinion polls.
• An important EU inter-governmental conference for Croatia's EU accession negotiations was cancelled.
• The exchange rate remained stable in April, averaging around HRK7.40:1.
• Following the recent two-week IMF mission in Croatia, which coincided with the revision of the 2009 government budget, the IMF gave modest approval for the new budget.
• There was a noticeably smaller year-on-year contraction of industrial output in March compared with February, but the rate of decline in retail trade worsened significantly in February.
• After accelerating by 4.2% year on year in February, compared with 3.4% in January, consumer price inflation slowed to 3.8% year on year in March.
• The trade deficit in January-February was 40% smaller year on year in euro terms, as the decline in imports was much steeper than the decline in exports.