2012-02-06 06:35:06 - New Country Reports research report from Business Monitor International is now available from Fast Market Research

Core Views While we expect household consumption to remain supportive of economic growth in 2012, we believe government spending and investment will be less so. We also highlight that Croatia's economy remains highly reliant on the external environment, and a deeper deterioration of this would put our forecasts in jeopardy. We expect the weak recovery in domestic demand to prohibit stronger inflationary pressures from manifesting over the medium term. Despite government officials' statements that Croatia should not rush to join the eurozone, we expect economic and political convergence with the single currency bloc will remain a priority for Zagreb. While it is unsurprising that Croatia has followed the Czech Republic and Poland in becoming more guarded towards joining the euro

area, we expect that Croatia's economic reliance on the bloc, high degree of involvement in the eurozone economy and a wish to boost foreign investment will translate into a sustained effort to qualify for euro adoption. Major Forecast Changes We have revised down our forecast for real GDP growth in 2012 to 1.1% from 1.7% previously. Given a high dependence on the external sector for expansion, we expect the continued moderation in external demand to weigh heavily on economic activity. Our government budget deficit forecasts (as a share of GDP) have been revised downwards in line with our lower expectations for real GDP. We now forecast the deficit to come in at 4.7% of GDP in 2012, from 3.7% previously. However, we caution that further downside risks exist given our expectation for a centre-left government to come to power in parliamentary elections in December 2011. Key Risks To Outlook Due to Croatia's high reliance on export demand and external financing, we continue to highlight the downside risks that the eurozone debt crisis poses to Croatia's economic outlook. If eurozone policymakers fail to stem the escalating debt crisis, then Croatia would face severe macroeconomic turbulence. The risks to Croatia's fiscal position are firmly to the downside. Despite a consensus among political parties that the deficit must be tackled, in line with Zagreb's aspiration to eventually join the euro, there is a growing risk that our forecasts will be overshot even after our recent forecast revisions. The economic situation is weak and likely to weigh on government revenues.
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