The European Bank for Reconstruction and Development (EBRD) said in its latest economic forecast for the EBRD region on Tuesday that Croatia's real GDP growth in 2012 would be 1 percent, almost halving the previously forecast growth rate.
In its previous forecast in October 2011, the EBRD projected a growth rate of 1.9 percent for Croatia in 2012.
The EBRD now estimates that Croatia's economy saw a 0.3 percent growth rate in 2011, as against a previously projected rate of 0.5 percent.
"In Croatia, the economy appears to be stuck in a rather stagnant mode, and growth in 2012 is not likely to surpass 1 per cent, with significant downside risk.
"However, the signing of the EU Accession Treaty at the end of last year, its anticipated ratification by the Croatian parliament following the positive referendum result on 22 January 2012 and the realistic prospect of full EU membership in mid-2013 are positive signs for the medium term and may help to revive confidence and investment," the bank says.
The EBRD has downgraded its growth forecast for the region of Central Europe and the Baltic states, which includes Croatia, to an average rate of 1.4 percent, slightly less than the 1.7 percent growth projected last October. According to the bank's current estimates, last year the region saw economic growth of 3.4 percent.
The EBRD's forecasts for Southeastern Europe as well as for Eastern Europe and the Caucasus have been downgraded as well. The bank warns that further deterioration of the situation in the eurozone could have a negative impact on the entire EBRD region and calls for a coordinated response of all players to contain the impact of the eurozone crisis on Eastern Europe.
Central and Southeastern Europe are especially vulnerable to pressures from the eurozone, the EBRD warns, noting that the financial and commercial sectors and capital flows were possible channels for the transfer of problems.
It points to very weak real credit and its possible decline as of the end of summer in most of Central and Southeastern Europe. In that context, the bank sees Croatia, Estonia, Hungary, Slovenia, Bulgaria and Macedonia as particularly vulnerable.
The EBRD further warns that capital inflows reversed in the third quarter of 2011 for the first time since 2009, with capital starting to withdraw from the region. The bank does not expect the situation to change this year considering capital scarcity and high risks in Western Europe. It also points to information that Western banks appear to be deleveraging since the autumn in most EU newcomers.
The EBRD warns that Western banks' branches in Eastern Europe would be given less help from the parent banks which must reinforce their capital. The bank branches will consequently issue fewer loans to the business sector, thus contributing to a slowdown of real economy, the EBRD says in the report.
