"Croatia's economy is expected to grow in 2015 at a modest rate of 0.3%. The marginal upward revision of 0.1 pp. since the previous forecast is attributable to the improved growth prospects in Croatia's trading partners, partially offset by additional fiscal consolidation measures," the Commission said.
The Commission forecasts that all member countries will see growth this year except Cyprus, for which a 0.5% contraction is predicted, with Croatia and Finland recording the lowest growth rates, both 0.3%. Ireland and Malta, on the other hand, should see the highest growth rates, both 3.6%.
"Internal demand is expected to detract from growth for one more year (in Croatia), though the pace of the contraction should gradually abate," the Commission said, adding that "investment is set to further contract 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 enterprises.
"In addition, low absorption of EU funds, on-going deleveraging pressures and weak private demand are set to still hold back investment activity in 2015," the Commission said, adding that the "timid recovery, however, remains fragile, as it relies exclusively on external demand. Exports of goods and services grew by slightly more than 6% in 2014, but internal demand continued to drag on growth, with the rate of contraction even accelerating in the fourth quarter."
"Employment is nevertheless set to stagnate, while the need for further consolidation of public finances in 2016 will weigh on Croatia's fragile growth," the Commission said.
Also, "the contraction in private consumption is set to come to an end in 2015, thanks to the positive impact of reforms to personal income taxation and lower oil prices." After increasing 2.7% last year, employment is set to stagnate this year and expected to increase 0.5% in 2016. As for unemployment, this year it is forecast at 17% and at 16.6% in 2016.
According to the Commission, "exports are expected to grow by 3.7%, driven by improved cost-competitiveness and especially the acceleration of the recovery in the rest of the EU. On the back of weak internal demand, imports are expected to grow at a moderate pace of 2.4%, thus increasing Croatia's current-account surplus."
"Growth is set to pick-up somewhat to 1.2% in 2016, as the contraction in all domestic demand components is expected to come to an end. Investment, in particular, is set to rebound as a result of increased absorption of EU structural and investment funds and improving expectations. Net external demand should continue contributing positively to GDP growth, though more moderately, as imports are set to accelerate," the Commission said.
Risks to this forecast scenario are mainly tilted to fiscal consolidation measures and bringing the general government debt on a sustainable path, it added.
The general government deficit was 5.7% of GDP in 2014 and is set to drop to 5.6% this year and again increase to 5.7% in 2016. This is the biggest budget deficit among EU countries.
The public debt is expected to increase from 85% in 2014 to 90.5% this year and 93.9% in 2016. Inflation is expected to decrease from 0.2% in 2014 to 0.1% this year and increase to 1.3% in 2016.