The European Commission (EC) raised its 2017 GDP growth forecast for Croatia to 3.2% in its Autumn 2017 Economic Forecast from 2.9% in its spring forecast. GDP expansion will be supported by domestic demand.

Central and Eastern Europe (CEE) is booming at the moment as bne IntelliNews reported in its cover story this month. But the commission expects Croatian growth to slow in the following two years, to 2.8% in 2018 and 2.7% in 2019.

The restructuring of the distressed food-processing and retail group Agrokor – Croatia’s largest private sector employer – appears to have had a smaller-than-anticipated effect on output in the first half of the year, the EC noted.

Agrokor, Croatia’s largest company and one of the largest employers in the SEE region, is undergoing restructuring after a debt crisis pushed it to the brink of collapse earlier this year. As it became clear that Agrokor would be unable to make upcoming debt repayments, the Croatian government stepped in to appoint emergency management at the group. The audit report, released on October 9, also showed that Agrokor Group’s net loss in 2016 amounted to HRK11bn (€1.46bn) last year. The company’s liabilities amounted to €56.3bn in 2016.

“Growth is set to remain robust and broad-based in 2017. However, economic activity is expected to lose some of its momentum over the next two years and the volume of GDP is only set to return to its pre-crisis level in 2019. The potential negative impact on growth of the ongoing Agrokor restructuring is still looming,” the EC said.

Household consumption is expected to remain strong thanks to employment growth, rising wages and supportive credit conditions. Investment should remain the most dynamic domestic component, with public investment enjoying a boost from the absorption of EU structural funds.

The EC projects unemployment to continue falling, although at a slower pace, as the pace of job creation moderates and outbound migration flows diminish. The EC sees the unemployment rate dropping to 11.1% this year from 13.4% in 2016. The rate should fall further to 9.2% in 2018 and 7.5% in 2019.

“The tightening labour market and wage increases in the public sector are projected to raise the cost of labour in both 2017 and 2018. This, coupled with the adjustment in energy prices, is set to push inflation up to 1.3% in 2017. Thereafter, the inflation rate is expected to increase slightly, with core inflation picking up towards the end of the forecast period,” according to the report.

The EC sees Croatia’s general government deficit at 0.9% of the GDP this year, while general government gross debt should reach 80.3% of the GDP in 2017 and fall to 77.4% of GDP next year.

The EU's Economic and Financial Affairs Council (ECOFIN) closed excessive deficit procedures (EDP) for Croatia in June, thanks to the improvements in the Adriatic country’s budget metrics. The country had been subject to the procedure since January 2014, when it was found to be in breach of both deficit and debt criteria. In addition, the country’s economy has recovered after a long recession.