Country Report Croatia September 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 July.
• 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 5.4% 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 0.3% in 2010.
• The kuna is expected to depreciate to an average of around HRK7.40:???1 in 2009, before strengthening to HRK7.38:???1 in 2010.
• We forecast that average annual inflation will decline to 2.5% in 2009 and remain low in 2010, at 2.6%.
• The current-account deficit is forecast to narrow to around 6% of GDP in 2009 and to 5.6% of GDP in 2010.

Monthly review

• According to the latest Promocija Plus opinion poll, Ivo Josipovic, the presidential candidate of the Social Democratic Party (SDP), has the highest level of support, at 32.9%. The HDZ candidate, Andrija Hebrang, has 17.3%.
• At a meeting in September between the prime minister, Jadranka Kosor, and her Slovenian counterpart, Borut Pahor, it was agreed that the issues of border demarcation and Croatia's EU accession would be kept separate.
• In January-May 2009 the consolidated central budget posted a deficit of HRK5.6bn (about US$1bn), equivalent to 1.7% of forecast full-year GDP.
• The Croatian Association of Trade Unions (HUS) is planning to protest in September against the government's recent tax measures.
• According to the flash estimate from the Central Bureau of Statistics, real GDP contracted by 6.3% year on year in the second quarter.
• Industrial production and retail sales continued to record significant year-on-year contractions in the months around mid-year.
• In July there was month-on-month disinflation of 0.7%, which brought inflation down from 2.1% year on year in June to 1.2% in July.

This report covers the following industry codes:
SIC Code: 49;60
NAICS Code: 22;52