The governing coalition, led by the Social Democratic Party (SDP) and including the Croatian People's Party (HNS), the Istrian Democratic Assembly (IDS) and the Croatian Pensioners' Party (HSU), is looking increasingly unstable. The sacking of the minister of finance, Slavko Linic (SDP), has exposed deep divisions within the government and the party. However, the continued widespread unpopularity of the main opposition Croatian Democratic Union (HDZ) should see the current government remain in power until the next election in late 2015. Croatia joined the EU on July 1st 2013, but accession was marked more by apathy than enthusiasm among the population. Political structures are generally overstaffed and inefficient, and despite some progress, The Economist Intelligence Unit expects this to remain a problem. Concerns about corruption will persist, but we expect improvements in line with the gradual strengthening of the judiciary. Relations with other former Yugoslav states are now relatively good.
As a small, open economy, Croatia's medium-term prospects depend heavily on the global economic outlook, and in particular on the outlook for the EU, which is Croatia's main trading partner. In 2015-18 we forecast that growth in Croatia will pick up to an annual average of 1.9%. This compares with an annual average of 4.1% in 2004-08, before the global economic crisis. Tighter credit conditions, a challenging external environment, fiscal consolidation and a worsening demographic profile will preclude fester growth rates during the forecast period. An upside risk to our forecast is that further progress on structural reforms could lead to greater foreign investment inflows than we currently expect. The current-account deficit is expected to expand in 2015-18, but will remain lower as a percentage of GDP than before the 2008-09 crisis.
Average annual real GDP growth will be significantly lower in 2015-30 than in 2000-13 (when it grew by 2%). Institutional and regulatory deficiencies will remain constraints on growth, as will the poor demographic outlook. Overall, we forecast that real GDP growth will average 1.3% per year in 2015-30. Although low, this forecast already assumes a significant increase in total factor productivity growth relative to the historical period. The risks to this outlook are to the upside, but require a less severe demographic and labour force decline and stronger progress on supply-side reforms than we currently expect.

ML 5

ML 6

Croatia-highlights 7

Political outlook 7

Demographic outlook 7

Business environment outlook 7

Economic outlook 8

Market opportunities 8

Long-term outlook 8

Fact sheet 9

Political outlook 10

Political forces at a glance 10

Political stability 10

Political and institutional effectiveness 11

Election watch 12

Key players to watch 12

International relations 13

Demographic assumptions 14

Business environment outlook 16

Croatia's business environment at a glance 17

Macroeconomic environment 18

Policy towards private enterprise and competition 19

Policy towards foreign investment 19

Foreign trade and exchange controls 20

Taxes 21

Financing 22

The labour market 23

Infrastructure 24

Economic forecast 26

Policy trends 26

Fiscal policy 26

Monetary policy 27

International assumptions 28

Economic growth 28

Sectoral trends 29

Inflation 30

Exchange rates 30

External sector 31

Foreign direct investment in Croatia 31

Market opportunities 33

Market outlook 33

Long-term outlook 35

The long-term outlook 35

Methodology for long-term forecasts 37

Data summary 39

Data sources and definitions 44

Guide to the business rankings model 45

Indicator scores in the business rankings model 46

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