October 5 (SeeNews) - The World Bank said it increased its forecast for Croatia's gross domestic product (GDP) growth in 2022 to 6.4%, up 2.6 percentage points compared to its previous prediction made in June.
It also slashed by 1.6 percentage points, to 1.8%, its forecast for the Adriatic country's economic growth in 2023, as rising uncertainties in external environment and inflation are weighing on real incomes and external demand.
“While the economy is expected to continue growing over the medium-term, albeit at a subdued pace, risks to the outlook are tilted to the downside,” the global lender said in its Europe and Central Asia Economic update report released on Tuesday.
The World Bank expects that inflation in Croatia will reach 10.1% this year and will slow down to 3.9% in 2023.
The main challenges pertain to the implications of the war in Ukraine, particularly, gas imports from Russia, decline in real incomes as a result of rising inflation, monetary policy tightening, rising financing costs, and uncertainty, according to the report.
In addition, a slowdown in key trading partners like Germany could also have a negative impact on exports. Furthermore, monetary tightening by the ECB might be stronger than currently expected. Lower growth and higher inflation would require additional fiscal support, with negative consequences for the elevated debt level.
Croatia is set to join the eurozone in 2023.
“While these achievements are expected to strengthen the country’s resilience and bring longterm economic benefits, raising potential growth will still primarily depend on prudent national policies,” the World Bank said.
Croatia’s relatively low productivity growth remains a key obstacle for faster convergence towards the average EU income levels, as the sectoral composition of the country’s economy and relatively large role of low-skilled services such as tourism explain only a small part of the lagging productivity, it added. The main challenges lie within sectors and are related to market frictions and barriers to competition between firms as well as low investment in R&D and low technology adoption rates, the global lender said.