The EC said on May 5 it expects the Croatian economy to exit recession this year and grow by real 0.3%, supported by external demand. The projection is part of the spring economic forecast and represents a small upgrade from the 0.2% growth expected in February.

The growth is seen strengthening to 1.2% in 2016 as contraction in all domestic demand components is expected to come to an end. The 2016 outlook was also revised up from 1% projected in the winter forecast. Net external demand will continue to have a positive impact on the GDP growth next year, but at a more moderate pace, as imports are set to accelerate.

The commission noted that the Croatian economy is likely to have stagnated in the first quarter of this year. On the one hand, sentiment indicators suggest an improvement in expectations, also confirmed by a pick-up in retail trade. On the other hand, industrial production registered a steep fall of 4% in January, which was partially offset by a rebound in February.

The EC expects domestic demand to continue falling this year. Investment is seen declining by 1.8%, mainly as a result of the strong contraction registered in the last quarter of 2014, but also taking into account the planned withdrawal of profits from state-owned companies. Moreover, low absorption of EU funds will put pressure on investments. However, investment is set to rebound in 2016, as a result of increased absorption of EU structural and investment funds and improving expectations.

Private consumption is expected to post a modest growth of 0.1% this year thanks to the positive impact of reforms to personal income taxation and lower oil prices.

As of January, the Croatian monthly non-taxable income increased to HRK2,600 (€338) from HRK2,200. Also, the highest income tax rate of 40% applies to net monthly salaries exceeding HRK13,200 and not just HRK8,800 as before. 

Unemployment will remain high, although the jobless rate is seen falling gradually to 16.6% in 2016.

The EC expects the general government deficit to reach 5.6% of GDP this year and 5.7% next year.

“In 2015, the personal income tax rebate will be offset by consolidation measures presented in April, while the pick-up in growth should bring the budget deficit to 5.6% of GDP. In 2016, the deficit is forecast to remain broadly unchanged, in spite of the moderate pick-up in growth,” the commission said.

The ratio of public debt to GDP is forecast to increase from 85% in 2014 to 90.5% in 2015 and 93.9% in 2016.