Croatia is a small but complex market. It is about the size of Denmark, but its geography divides it into two distinct markets - the more affluent and tourismoriented costal region along the beautiful Adriatic Sea, and the inland region, dominated by agricultural and industrial activities. The country’s population of roughly 4.5 million is largely homogenous in ethnicity, language and religion; but in the summer months its numbers are doubled by tourists from throughout Europe and the world, making it a cosmopolitan market for products and services.
Croatia became 28th EU member state on July 1, 2013. EU accession negotiations provided an additional impetus for the Croatian Government to undertake measures in recent years to address corruption and bureaucratic and judicial inefficiency.
The current Croatian Government (elected in December 2011) has demonstrated its determination to find new and more effective ways to consolidate public spending, improve the business climate, and foster economic growth. The EU Excessive Deficit Procedure should in the period from 2014-2016 help Croatia commence with much-needed structural reforms in parallel with fiscal consolidation.
After five years of recession, achieving job-rich growth while ensuring that fiscal consolidation remains on track is a key challenge for the short term, while improving competitiveness through structural reforms is crucial in the medium term. In tackling these challenges and in order to meet the EU 2020 goals Croatia will much rely on EU funds and foreign investments. EUR 8.5 billion will become available to Croatia in the period 2014 – 2020 from Structural and Cohesion funds.
This is a great opportunity for Croatia to further develop and use available know-how and technology and reach the average EU level in the environmental protection (primarily waste, water and wastewater management), renewable energy production, energy efficiency and infrastructure sectors.
Substantial EU funds will also be available for agriculture which has been
underdeveloped despite the favourable environmental conditions.
The process of EU integration of the Western Balkans is moving forward with Croatia providing cross-border support to the neighbouring countries to accelerate the process with the aim to sustain stability and open markets.
In brief, Croatia is a market of regional opportunity. Businesses considering entry should plan well but also consider Croatia’s position as the preeminent stepping-stone for developing most sectors in southeast Europe.
The pre-crisis boom, which had been fuelled by a high inflow of foreign investment, gave way in 2009 to a protracted downturn, amplified by the structural weaknesses of the economy. The recession deepened in 2012, with real GDP falling by 2 %. The improved international environment, EU accession and new legislation adopted to reinforce the investment climate should underpin a moderate recovery in 2014 and stronger onwards. The unemployment rate increased substantially in 2012, reaching 15.9 %, with youth unemployment rising to 43 %. Overall unemployment is expected to rise to 19.1 % in 2013 and decline somewhat in 2014 and particularly in 2015. Inflation averaged 3.4 % in 2012 and is expected to remain high at 3.1 % in 2013 before falling to 2 % in 2014. A slight uptick in inflation is expected in 2015, in line with the recovery of domestic economic activity.
Croatia’s general government deficit reached 5.4% of GDP in 2013 which resulted in European Commission’s decision to initiate Excessive Deficit Procedure in 2014. Commission recommends ending the present excessive deficit situation by 2016. This longer adjustment path would help bring the deficit below the 3% of GDP and debt ratio to 60% of GDP enabling Croatia to pursue much-needed structural reforms in parallel with fiscal consolidation. Croatia faces important challenges. After five years of recession, kickstarting job-rich growth while ensuring that fiscal consolidation remains on track is a key challenge for the short term, while improving competitiveness and strengthening confidence in the financial sector is crucial in the medium term. The robust tourism sector and the available EU funds will be one of the key drivers of recovery, although tentative signs of a greater upturn in domestic consumption could pave the way for higher growth rates over the longer term.