September 12 (SeeNews) - Erste Group said it has affirmed its forecast for Croatia's economic growth in 2018 at 2.8%, while seeing the risks as balanced, it said.
The headline figure should remain supported by ongoing solid private consumption momentum and the still only modest recovery in investments, the banking group said in a macro outlook on Croatia on Tuesday.
Following normalization in the second quarter, when GDP growth landed at 2.9%, external demand is seen as maintaining a steady role throughout the year, being seasonally boosted by tourism, although net exports are seen as being in the red in 2018.
In regards to inflation, Erste noted it expects only a gradual acceleration of demand-side pressures, reflecting a steady consumption profile, and ongoing mid-single-digit wage pressures.
"The supply side remains mostly sensitive to energy prices, while we continue to see food prices playing a broadly neutral role. Hence, towards YE18, the reversing base effect should support y/y trending back below the 2% , while, courtesy of stronger energy-related pressures, we revised our call for average CPI in 2018 to 1.7%," Erste explained.
The banking group warned that political risk in Croatia is elevated, given that the restructuring of the country's concern Agrokor remains a burden for the prime minister and has recently been joined by problems in the shipbuilding sector.
Erste said that despite turbulence, cooperation between the ruling HDZ party and its junior partner HNS remains pragmatic, although early elections are not to be excluded.
The fragile political setup, Erste forecast, will likely continue to impede the reform agenda, with lack of progress in healthcare and judiciary, managing SOEs and potential reversal of pension reform serving as good examples.
Hence Croatia, the banking group concluded, is likely to maintain its laggard status versus CEE peers when it comes to upgrading the potential growth rate and convergence process dynamics.