Public consumption growth is set to accelerate to 3.8% in 2006 and 4.3% in 2007, the Commission said, citing continued strong credit growth, improved consumer confidence and one-off payments to pensioners.
Public consumption is expected to grow stronger than in recent years, by 2% in 2006 and 1.1% in 2007, driven by an increase in public sector employment by 1% in 2006 and pre-election spending prior to the parliamentary elections scheduled for late 2007, analysts in Brussels said.
The growth of real export will accelerate to 5.5% in 2006 and 5.8% in 2007, in particular backed by strong exports of services in line with the assumption of further improvements of tourism performance.
As a result of strong private consumption, real imports are expected to accelerate to 3.6% in 2006 and 4.3% in 2007. Net exports will contribute 0.5 and 0.3 percentage points to growth in 2006 and 2007, respectively.
Croatian monetary authorities will continue to keep inflation at relatively low levels over the forecast period. Annual average consumer price inflation will slightly increase to 3.7% in 2006, while in 2007 inflation will slightly fall to 3.5%
The employment growth rate will increase from 0.8% in 2005 to 1.0% in 2006 and 1.2% in 2007, which will contribute to a gradual reduction of the unemployment rate to 12.3% by 2007.
Real wage growth is expected to accelerate to 3.5% on average over the forecast period, leading to an increase in real unit labour costs of 0.4% in 2007.
Even though the process of moderate fiscal consolidation is expected to continue, stronger public consumption will prevent a more significant deficit reduction, so the European Commission expects that the general government deficit will be reduced from 3.9% of GDP to 3.5% in 2006 and 3.4% in 2007.
The foreign trade deficit will only marginally decline over the forecast period and is set to stay at around 24% of GDP.
There will be a gradual but only marginal reduction of the current account deficit to 6.1% of GDP in 2006 and 6% in 2007.
Brussels expects that net foreign direct investments, which are largely driven by further major privatisation deals, will finance a significant share of the current account deficit over the forecast period.