The growth projection is based on increasing domestic demand, exports and investment as unemployment is gradually decreasing. However, external factors, such as weaker growth in Croatia's main trading partners, the stricter monetary policy of the US central bank, the Fed, and the increase in risk premiums on emerging markets, might affect the weak recovery through reduced exports and increased financial costs for the already overindebted public sector and other domestic sectors, Madzarevic Sujster said.
As for the current situation in the country, the WB Office in Croatia believes that the protracted formation of a new government and the uncertain extent of fiscal consolidation measures might reduce investor confidence and undermine the growth prospects in 2016 and 2017.
In order to ensure macroeconomic stability and growth, it is essential to continue dealing with fiscal weaknesses and the high rates of inactivity and unemployment and to resolutely implement long-term structural reforms, Madzarevic Sujster said.
The report says that the economic recovery in the European Union is gaining strength, but the pace of growth continues to be modest, despite accommodative monetary policy and favourable financial conditions, and investment remains subdued.
"The EU is gradually emerging from a protracted economic downturn that led to an increase in poverty in many countries. Continued easing of financial conditions, improved confidence, low commodity prices and a reduced drag from fiscal consolidation will continue to support growth in 2015 and 2016," said Theo Thomas, WB lead economist and co-author of the report. "However, a prolonged period of low investment growth, a slowdown in emerging-market growth, higher financial volatility and regional tensions could undermine the outlook."
According to him, private consumption is the main driver of the EU recovery, because growing wages and employment, bolstered by low consumer-price inflation due largely to subdued commodity prices, have raised household incomes and spending.
The WB expects growth in the EU to reach 2.0 percent in 2015 and 2.1 per cent in 2016. It projects that growth will strengthen from 1.8 per cent year on year in the first half of 2015, with Central Europe experiencing the highest growth, driven by the Czech Republic, Poland and Romania.
Romania is expected to grow at 3.6 per cent in 2015 and 3.9 per cent in 2016, fuelled by a surge in private consumption and supported by fiscal measures. Poland is projected to reach 3.5 per cent in 2015 and remain above this level over the medium term, as improved labour market conditions raise real disposable household incomes and consumption.
Southern Europe's growth rates, at 1.4 per cent in 2015 and 1.6 per cent in 2016, are likely to be the slowest, but a significant improvement from less than 0.5 per cent in 2014, the report says.