In its latest Croatian Economic Outlook Quarterly, the Institute reduces the gross domestic product growth forecast for 2011 to 0.2 per cent and predicts a 0.3 per cent economic downturn for this year.

The analysts recall that in the third quarter of 2011, Croatian GDP grew 0.7 per cent on the year, going up for two consecutive quarters for the first time since 2008, but add that data available for the last quarter point to a downturn.

They predict that the economy has entered another recession at the turn of this year and expect a mild recovery, with a one per cent GDP growth, only in 2013.

They note that their predictions were prepared before the government presented its budget drafting guidelines.

The analysts' fiscal policy forecasts are based on the assumption of moderate fiscal consolidation in keeping with the government's programme for the 2011-15 period. They took into account the planned value added tax increase from 23 to 25 per cent, the imposition of a lower VAT rate on some goods, and the assumption that taxes on lower salaries will be reduced so as to cushion the VAT increase.

The EIZ analysts predict a surplus in the current account both this and next year, and inflation to reach 2.6 per cent this year and 2.7 per cent in 2013 because of the tax changes and higher prices.

They do not predict an improvement of the negative trends on the labour market this year, forecasting an 18.1 per cent unemployment rate.

They expect depreciation pressures to continue and that this will limit the central bank in relaxing the monetary policy, which in turn will limit credit activity as well.

The EIZ analysts underline that projections are very uncertain because of the growing instability of the global economy, notably the euro zone, and the high vulnerability of the domestic economy.