The European Commission has downgraded Croatia's expected GDP growth in 2018 to 2.6 percent, from its previous forecast of 2.8 percent, adding that growth for the remainder of the year would be impacted by domestic spending, and that the risk from the collapse of the indebted food and retail giant Agrokor has been reduced.
In its summer forecast, released on Thursday, the Commission estimated that the growth of Croatia's gross domestic product (GDP) in 2019 could further slow down to 2.5 percent.
"Following the unexpected slowdown in the last quarter of 2017, real GDP growth edged up only slightly in the first quarter in 2018, mainly thanks to robust private consumption and recovering investment," the European Commission said in their report.
Croatia's economy expanded in Q1 2018 by 2.5 percent year-on-year, picking up from the 2.2 percent growth recorded in Q4 2017.
Nevertheless, and despite mixed signals by macroeconomic indicators, positive developments in the labour market and survey data suggest that domestic demand will fuel growth over the rest of 2018, the Commission said.
Personal spending is expected to remain the main driver of growth throughout the forecast period, supported by a rise in households' disposable income, as well as low inflation.
"Improved usage of EU funding, decreasing interest rates and increasing credit flows to the corporate sector should help growth in investments," they added.
The early data on tourist arrivals and overnight stays also support expectations of a strong growth in exports of services in 2018, " they said.
At the same time, the sudden slowdown in export of goods in early 2018 is in line with the observed weakening of the manufacturing sector.
According to the state statistics bureau, over the first five months of this year industrial production in Croatia dropped by 0.2 percent compared to the same period the year before.
Meanwhile, Croatia's export of goods increased inched up 1.2 percent in the first five months of the year, while imports increased by 4.7 percent.
However, the impact of the expected lower growth of goods exports on Croatia's GDP should be partially offset by a slowdown in the growth of imports, as domestic manufacturing is import-intensive, the EC said.
Noting that Agrokor's debt-for-equity settlement plan has been adopted by creditors, the Commission said that the development has reduced negative risks for the upcoming period, adding that the successful implementation of the plan is essential to the group's operational and financial stability.
Labour market conditions continue to improve. Wages are projected to continue rising, as labour shortages become more apparent in the tourism and construction sectors.
"The unemployment rate should continue declining, mainly thanks to rising employment, while outbound migration flows appear to be slowing down. In the first five months of 2018 inflationary pressures remained contained, despite rising energy prices," the European Commission said.
"Strong consumer spending and rising wages are expected to eventually drive consumer price inflation up to 1.6 percent in 2018, and 1.8 percent in 2019," they added.
Most domestic and foreign analysts also expect a slowdown in Croatia's economic growth compared to last year's 2.9 percent GDP growth.
The central bank had forecast a 2.8 percent growth, as did the International Monetary Fund (IMF), while the European Bank for Reconstruction and Development (EBRD) said they expected the national economy to grow by 2.7 percent. The World Bank has forecast a growth of 2.6 percent.
The government has based its 2018 budget on an optimistic estimate of 2.9 percent GDP growth.