In 2007, GDP growth of 5.3 percent

Following a strong GDP growth of 7 percent in the first quarter of this year, a gradual easing of dynamic trends is expected, with GDP growth projected at 5.3 percent in 2007 and 4.4 percent in 2008, according to forecasts from the Zagreb Institute of Economics contained in the latest issue of the publication Croatian Economic Outlook Quarterly.

Personal consumption is expected to remain relatively strong, investment growth will slow, and exports will strengthen. Positive trends in the labor market are expected to continue, with a decrease in the unemployment rate and gradual wage growth. The inflation rate is expected to rise slightly, from 2.5 percent in 2007 to 2.8 percent in 2008. For analysts at the Institute of Economics, the main risks to economic growth relate to a relatively strong imbalance in foreign trade and fiscal expansion. In the fiscal sphere, it is already clear that some recently undertaken measures will have adverse effects on the long-term sustainability of public finances, as stated in the Institute’s press release. It is noted that the forecasts from the Institute of Economics, presented in the publication Croatian Economic Outlook Quarterly, are optimistic. Although such high growth rates as in the first quarter are not expected in the remainder of this year and during the next year, the economy will maintain relatively strong dynamics.

The expected slowdown is a result of weaker growth dynamics in the environment and post-election “deflation” of investment and personal consumption. Total exports of goods and services are expected to achieve solid growth, but a fairly strong import associated with strong domestic demand is also anticipated, which will lead to an increase in the current account deficit to about 8 percent of GDP this year. Positive trends in the labor market are expected to continue – employment should grow, leading to a decrease in the unemployment rate to 15.3 percent in 2007 and 14.5 percent in 2008. During 2007 and 2008, further strengthening of the effects of previous measures by the Croatian National Bank aimed at curbing the growth of credit activity in the banking sector is expected, reducing credit growth to 14 percent in 2007 and 12 percent in 2008.

Analysts at the Institute of Economics point to certain risks embedded in the projections, noting that the imbalance in foreign trade is an obstacle to maintaining high growth rates over a longer period. They warn that the problem of relatively high foreign debt cannot be resolved solely through monetary policy measures. The current growth of fiscal revenues represents an opportunity for fiscal balancing, and thus for reducing the external vulnerability of the economy, but such a development is difficult to expect in an election year. It is already clear that some pre-election moves will have negative consequences for the long-term sustainability of public finances, assess analysts at the Institute of Economics.