The centre-right government led by the Croatian Democratic Union (HDZ) faces serious challenges in 2009-10, not least in maintaining its direction after the surprise resignation of Ivo Sanader as prime minister. In the wake of several gangland-style murders, there will be continuing domestic and external pressure on the government to combat organised crime and to enforce the rule of law. EU entry will not occur before 2011. There is a risk even to this date, because of uncertainty over the future of the EU's Lisbon treaty and the ongoing border dispute with Slovenia. The Economist Intelligence Unit forecasts a 4% contraction in real GDP in 2009, owing to falling domestic demand and a weakening euro zone, which will hit Croatian exports and tourism. We forecast growth of just 0.2% in 2010. The kuna is expected to depreciate to an average of around HRK7.44:???1 in 2009, before regaining some ground in 2010. We forecast that average annual inflation will decline to 2.8% in 2009 and to 2.6% in 2010.

The current-account deficit is forecast to narrow to around 6% of GDP in 2009 and 5.6% of GDP in 2010.

 

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