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Croatia ‘Likely’ to Enter Recession, World Bank Says

Croatia’s economy will slide into a recession in 2012 as Europe’s debt crisis hinders growth and the government delays cuts in state administration and spending, a World Bank economist said.

The economy will contract 1.1 percent next year, Sanja Madzarevic Sujster, senior economist in the World Bank’s office in Zagreb, told journalists today. The economy will grow 0.5 percent this year, Sujster said. The forecast matches one from Croatia’s central bank.

“Slowing export growth, weak credit growth, low investment and persistent unemployment” have resulted in a “sluggish recovery” this year and a likely recession in 2012, Sujster said.

Croatia, which is preparing to become the European Union’s 28th member in July 2013, is taking longer than its Balkan neighbors to climb out of a two-year recession. Foreign direct investment dropped to $583 million in 2010 from $6 billion in 2008, while the government still needs to strengthen the labor market and the “business environment,” the European Commission said on Oct. 12.

The ruling Croatian Democratic Union was toppled on Dec. 4 by an opposition bloc led by Social Democrats, which is expected to form a government by the end of the year. Premier-Elect Zoran Milanovic said on Dec. 6 he will introduce fiscal measures within 50 days of taking office to bolster the country’s credit rating and avoid seeking international aid.

‘Fiscal House’

Securing recovery and creating jobs require “shoring up confidence of financial markets, getting the fiscal house in order and pursuing structural reforms,” Sujster said.

The Washington-based lender targeted the budget shortfall for 2012 at 4.2 percent of gross domestic product, adding that in view of “new external and domestic development, the budget deficit could widen to about 6 percent,” Sujster said.

The budget gap for this year is forecast at 6.2 percent of GDP by the central bank and at 5.5 percent by the World Bank.

Among “policy options” that the new government could take to revive the economy, the “key candidates for consolidation” are public wages, social benefits and special pensions, Sujster said. Croatia also needs to relax its labor legislation and strengthen tax collection as an estimated 8 percent of the country’s GDP is lost through evasion in the gray economy, she said.

To contact the reporter on this story: Jasmina Kuzmanovic in Zagreb at jkuzmanovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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