The European Bank for Reconstruction and Development (EBRD) has revised upward its growth projection for the Croatian economy for this year to 0.9% and affirmed its forecast of 0.5% growth next year, according to the bank's latest Regional Economic Prospects report, released on Thursday.
In its previous report, released in May, the EBRD had forecast Croatian economic growth in 2015 at 0.5%.
"The Croatian economy saw a cumulative 12 per cent contraction between 2009 and 2014, the second largest in the EU after Greece. The expected return to growth is supported by a better-than-expected tourist season, stronger external demand and lower oil prices," the EBRD said.
"However, despite improvements in business sentiment, investment is expected to remain weak, pointing to remaining structural weaknesses. Growth in 2016 is forecast at a mere 0.5 per cent also due to continuing pressure for fiscal adjustment," it added.
"Growth in the region as a whole is expected to slow to just 0.2 per cent this year, from 1.8 per cent in 2014. Moderate growth of 1.6 per cent is expected in 2016. These forecasts are unchanged from May, but they mask regional differences."
Broken down by region, the EBRD sees a relatively strong outlook in central Europe and the Baltics, supported by Eurozone quantitative easing (QE) and lower commodity prices which are providing scope for easier monetary conditions in the region, which includes Croatia.
"The expected average growth rate of around 3 per cent in 2015 and 2016 provides for continued, albeit slow, convergence of income levels with those of advanced economies," the report says.
Economies in south eastern Europe are also benefitting from QE in Europe, the weaker euro and lower oil prices. Growth is expected generally to pick up in 2015 and be maintained in 2016. Greece's economy, however, is expected to contract both this year and next.
The EBRD warns that the economies of a number of countries are also affected by the ongoing refugee crisis, which has intensified this year. A massive influx of refugees has strained public services, government finances and labour markets. Transit countries in south eastern Europe, which provided refugees with medical and social care, food, water and accommodation, faced logistical and fiscal challenges.