The European Commission on Tuesday released its Spring 2016 Forecast, mildly reducing Croatia's economic growth outlook to 1.8%, the main reason for this being the poor results in Q4 2015.

"Growth is to resume at a slow pace following the disappointing fourth quarter of 2015. Croatia’s real GDP expanded by 1.6% in 2015, the first year of positive growth since 2008. The negative reading of real GDP growth in 2015-Q4, at -0.5% (q-o-q), weakened the momentum for growth into 2016," the European Commission said in its forecast.

In its winter forecast, the European Commission projected Croatia's growth in 2016 at 2.1% and in 2015 at 1.8%, which in the end was lower - 1.6%. The Commission projects a 2.1% growth for 2017, the same as in its forecast released in February.

According to its spring forecast, the European Commission expects euro area GDP of 1.6% in 2016 and 1.8% in 2017 after 1.7% in 2015.  GDP growth in the EU is expected to moderate from 2.0% last year to 1.8% in 2016 before reaching 1.9% in 2017.

Looking ahead, GDP growth in Croatia is set to reach 1.8% in 2016 and slightly accelerate in 2017, driven by domestic demand. Tailwinds stemming from low energy prices and a recovering labour market underpin a robust growth in household disposable income.

"However, with a depressed real estate market and falling prices, deleveraging pressures are not expected to ease substantially in the short term, leading to an overall modest increase in consumption," the Commission said.

Investment is set to gather pace, driven by a rebound in public investment. Private investment is set to grow only mildly, under the impact of deleveraging, the Commission said.

The outlook for the external environment deteriorated markedly in the first months of 2016. "As a result, growth of exports of goods is expected to decelerate, with market share gains for Croatian exporters to the EU set to progressively stabilise. After a record year for the tourism sector in 2015, service exports are set to register a more modest increase in 2016 and 2017. Imports of goods and services are projected to slightly outpace exports in both years, implying a neutral contribution to growth. Stronger import growth is set to be partially offset by improving terms of trade in 2016," the Commission said.

Modest employment growth is set to bring a reduction in the unemployment rate of about 0.8 pps. in both 2016 and 2017. The Commission expects nominal compensation of employees to resume growing above productivity, leading to a small increase in unit labour costs.

After Spain and Greece where the unemployment rate exceeds 20%, Croatia remains in the group of countries with the highest unemployment rates in the EU. The lowest unemployment rate in 2016 is recorded in the Czech Republic -- 4.5%.

The general government deficit dropped in 2015 and is set to continue improving mildly.

"The general government deficit decreased to 3.2% of GDP in 2015, down from 5.5% of GDP in 2014. The main driver of the sizeable improvement was a 22% drop in public investment. This, together with a further reduction in public subsidies and the wage bill, resulted in a slight decrease in general government expenditure in nominal terms. Revenue grew by a solid 4.4%, mainly on account of strong growth in indirect taxes. On the back of these developments, the primary balance turned to a surplus of 0.4% of GDP in 2015," the Commission said.

In 2016, the general government deficit is projected to improve further to 2.7% of GDP. Revenues are set to be positively affected by the reduction of a corporate tax allowance for reinvested earnings, the residual impact of the hikes in excise taxes in 2015 and the announced increase in the supplementary health insurance premium. These measures are expected to partly offset the 0.3% of GDP fallout of the corporate income tax due to the impact of the conversion of CHF loans on profits in the banking sector.

Supported by the strengthening primary surplus, public debt is expected to peak at 87.6% of GDP in 2016 and to decline slightly in 2017 to 87.3%.

In this year's budget, the Croatian government projected the general government deficit at HRK 9.2 billion or 2.7% of GDP. The government announced the stabilisation of the public debt and expects it to amount to 86.8% of GDP at the end of 2016, and by 2018 that it will further decline to 84.7% of GDP.

Greece is the only EU member for which the European Commission projected a 0.3% GDP decline in 2016. Next year, all EU member states should record an economic growth. The biggest growth this year is expected to Ireland (4.9%), followed by Romania (4.2%), Malta (4.1%) and Sweden (3.4%).

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