The national debt will exceed 60 percent of GDP as early as the beginning of 2014.

Real GDP in 2013 in Croatia could decrease by about 1 percent, while in 2014, an annual growth of economic activity of 0.7 percent is expected. During this year, unemployment could continue to rise, and real wages could fall, while due to stagnation in revenues and increased expenditures and state investments this year, an increase in the budget deficit is anticipated.

These are the assessments and forecasts from the July Information on Economic Trends and Forecasts published today by the Croatian National Bank on its website. Real GDP this year, according to current expectations, could decrease by about 1.0 percent, with a decline in personal consumption and state consumption and very weak growth in exports and investments expected.

For 2014, a gradual recovery is anticipated under the influence of growth in investments and exports, so GDP growth could reach 0.7 percent, with prevailing negative risks. At the same time, the contraction of personal consumption and state consumption will continue.

It is assumed that a procedure for excessive deficit will be initiated for Croatia under the Stability and Growth Pact of the EU, which will require relatively strong fiscal consolidation in 2014 and the following years, analysts from the central bank estimate. They believe that the intensity of recovery will depend on the realization of investment projects, import demand from major foreign trade partners, and the manner of implementing fiscal adjustment.

Analysts from the Croatian National Bank also warn that strengthening the export sector is crucial for achieving growth, as the Croatian economy is characterized by one of the lowest shares of exports of goods and services in GDP among comparable countries in Central, Eastern, and Southeastern Europe. Therefore, it is necessary to continue implementing structural reforms that will increase the export potential of domestic companies and attract export-oriented foreign companies.

Given the continued weakening of economic activity in 2013, further declines in employment and increases in unemployment are expected. The internationally comparable, survey unemployment rate could reach 16.7 percent, and from 2014, it could stabilize and gradually begin to decrease in the following years, in line with the expected economic recovery. The decline in unemployment could be more pronounced if employment abroad intensifies. Real wages could fall not only in 2013 but also in 2014.

The inflation rate of consumer prices will be noticeably lower than in the previous year, with the average annual inflation rate slowing from 3.4 percent in 2012 to 2.6 percent this year, and to 1.9 percent in 2014.

The kuna liquidity of the banking system will be high, and the Croatian National Bank will be ready to respond to possible pressures on the exchange rate.

The general government deficit (ESA 95) in 2013 could amount to 4.8 percent of estimated GDP, which is 1.0 percentage point higher than in 2012. The increase is primarily due to rising interest expenses.

For 2014, it is assumed that Croatia will have to begin fiscal consolidation due to the rules of the Stability and Growth Pact. Namely, for each EU member state whose general government deficit is nominally greater than 3 percent of GDP, a so-called excessive deficit procedure is initiated. The country is then given a deadline within which the budget deficit must be reduced to an acceptable level, with the annual amount of structural balance adjustment not being less than 0.5 percent of GDP.

Therefore, it is expected, they say at the Croatian National Bank, that in 2014 the deficit will be significantly reduced, and adjustments will have to continue in the following years. Since the tax rates of existing taxes in Croatia are already relatively high, adjustments should primarily be made on the expenditure side of the budget.

Although the adjustment of public finances will likely lead to somewhat poorer economic results in the short term, this adjustment is undoubtedly necessary to return public finances to a sustainable path. Namely, the Croatian general government debt could exceed 60 percent of GDP as early as the beginning of 2014, analysts from the Croatian National Bank note.