The Croatian National Bank (HNB) projects that real GDP growth in 2011 could be only 0.4 per cent and that this year GDP could stagnate or dip 0.2 per cent, warning on Wednesday that without fiscal consolidation and structural reforms, Croatia's economic prospects are very bad.
Lack of fiscal measures could also result in a downgraded credit rating, HNB analysts said in its latest report on economic trends and forecasts.
The economy is expected to stagnate this year and a mild growth could be posted only in 2013, the HNB says.
Such forecasts are primarily the result of a lower growth of foreign demand and the predicted fiscal consolidation. Declining export demand mainly mirrors unfavourable movements and predictions of low growth in European Union countries as well as the structural weaknesses of the Croatian economy.
In terms of fiscal movements, it is expected that the government, in order to retain the credit rating, will opt for a frugal budget and the continuation of structural reforms aimed at raising the national economy's competitiveness.
The first positive results of such measures are expected only in 2013, when a still modest growth is expected to be generated by the export of goods and services as well as stronger capital investments, notably in the private sector.
Financing conditions for domestic sectors in 2012 and 2013 are highly uncertain. The situation on the world financial market points to a pronounced tendency against risk, primarily because of problems related to the sustainability of public finances of more and more eurozone countries.
An improvement in financing conditions for the Croatian government and the domestic private sector can be expected only after the government reduces public finances to feasible frameworks, the HNB said.
The central bank went on to say that it had been supporting a high liquidity of banks in the national currency for some time in an attempt to influence financing conditions on the domestic market and stimulate a stronger recovery of bank lending.
However, trends so far show there are restrictions to reviving credit and real activity only through an expansive monetary policy, the analysts said, adding that the HNB did not depart from its policy of maintaining the stability of the national currency's exchange rate.
Last year saw the continued increase of the fiscal deficit and the general government's public debt, and a strong fiscal consolidation has been predicted for 2012 and 2013.
The general government fiscal deficit in 2011 could be about 5.7 per cent of GDP, while the general government debt could reach 45 per cent of GDP, which means that the general government's deficit and public debt have been increasing sharply for the third year running - a 16 per cent jump from the end of 2008 - which makes it clear that a turnabout in public finances is imperative.
The HNB's projection of public finances in 2012 and 2013 envisages strong fiscal adjustment, first of all by reducing government expenses, so that in 2013 the deficit could be reduced by about three per cent of the projected GDP.
