The European Commission continues to expect the Croatian economy to contract in 2013 but successful tourism season and higher public investment will render smaller negative growth as compared to previous estimates. The country's GDP would shrink by 0.7% in 2013 and return to a growth of 0.5% the next year, the EC said in the autumn edition of its European Economic Forecast, published on November 5. In its previous forecast, released in May, the commission was expecting 1% contraction for this year and a weaker GDP expansion of 0.2% for 2014.

The EC said that Croatia's EU entry in July has provided a boost to the economy, leading to higher domestic consumption in anticipation of higher excise taxes. In the first half of 2013, exports rose due to expected changes in the trade regime with partners from CEFTA. Data on industrial production and construction suggest that activity will remain weak in the remaining months of this year.

Private consumption will continue to be dragged down by weak nominal wage growth and declining employment, while investment will remain depressed due to bank deleveraging and uncertainty. However, investment will turn positive in 2014 buoyed by the availability of EU funds and the adoption of certain investment promotion legislation. Growth next year will also be underpinned by positive net exports as the manufacturing base is seen slowly recovering. Inflation is projected to ease in both 2013 and 2014 - to 2.6% and 1.8%, respectively.

Downside risks come from the EU accession, which leads to heightened competitive pressures for Croatia, the EC underscored. In addition, a further contraction of credit will also pose a risk to growth.

General government budget balance is projected to widen to 5.4% of GDP in 2013 and to 6.5% in 2014. The general government debt is expected to continue rising, reaching 59.6% of GDP in 2013 and 64.7% next year.