"The Croatian economy has contracted for the fifth consecutive quarter with the Bureau of Statistics confirming the earlier Q1 2010 real GDP flash estimate of -2.5% year on year (y/y)," reads the report.
The country faced a fall of 13.9% y/y in investment activity.
"Private consumption also continued to decline (down by 4.1% y/y), while public consumption fell by 1.1% y/y."
Exports grew 3.6% y/y, while weak domestic demand led to a 4.8% year on year drop in imports.
D&B expects "a fragile recovery in the second half of the year, with real GDP expanding by a meagre 0.5% for 2010 as a whole".
The agency warns that "the budget deficit exceeded its target during the January-June period, reaching EUR1.0 bn (as against the planned EUR1.2 bn for the whole year)."
"In order to finance the ballooning deficit and refinance mature liabilities, the government will issue three sets of bonds totalling EUR1.8bn," the report reads, adding that the government will have to accelerate the implementation of its Economic Recovery Programme.
The cabinet of Prime Minister Jadranka Kosor will have to win the public and political support for those efforts, the report reads.
However, this will not be an easy task following the departure of a junior partner -- the Croatian Social and Liberal Party (HSLS) -- from the ruling coalition and following the campaign by labour unions against the government-sponsored labour law amendments. The possible implementation of a referendum against the proposed legislation may harm "investors' confidence in the country's ability to improve its business climate".
One of the recent positive things highlighted in the report is the fact that Croatia and Russia have reached an agreement to start the DruzbaAdria energy project, which has been planned since 2002.
The future linking of the Croatian JANAF oil pipeline with the Russian pipeline Druzba will "make the town of Omisalj on the island of Krk the main export port for Russian oil on the Mediterranean Sea, thus bringing to both the company and the country significant financial and geo-strategic benefits."