Boston, MA -- (ReleaseWire) -- 05/21/2014 -- Croatia's economy will shrink for a sixth consecutive year in 2014, with the outlook for private consumption set to show barely any improvement over the coming quarters.
Although structural and competitiveness issues will keep a lid on export growth, weak domestic demand will ensure Croatia's current account remains in surplus over the next few quarters. We forecast the current account to come in at 0.1% of GDP in 2014.
Croatia's fiscal position poses one of the most significant threats to the country's economic recovery. Weak revenue growth will ensure that ambitious EU deficit reduction targets are missed, casting further doubts over the credibility of Croatia's sovereign credit risk profile. Inflationary pressures will remain subdued over the coming quarters, averaging just 1.8% in 2014. Although absent demand-pull pressures will keep price growth dangerously close to deflation, increased spending during the summer tourist season should avert a potential deflationary spiral.
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Regional tensions will remain elevated in 2014, due to Croatia's ongoing disputes with both Serbia and Hungary. Croatia's relationship with the EU is also likely to remain under strain, as the country's position within the bloc comes under pressure from the fallout from a difficult first year as a member state.
Major Forecast Changes
We have revised down our real GDP forecast to -0.3% in 2014, from 0.4% previously, against the backdrop of an increasingly bleak outlook for consumer spending over the coming quarters.
We now forecast the current account surplus to come in at 0.1% in 2014, from a previous forecast of 0.3%
Key Risks To Outlook
The main risks to our outlook for Croatia remain weighted firmly to the downside. Any significant slowdown in external demand would put pressure on already anaemic export growth, which would then translate into even worse labour market conditions and household incomes. Accordingly, we would look to downgrade our growth forecasts for 2014 if leading and high frequency indicators point towards a slower-than-anticipated pickup in demand in Croatia's main trading partners.
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