Erste sees Croatia's GDP contracting by 0.5% in 2015

The export outlook is also getting gloomier, with EU growth prospects and geopolitical tensions on the radar screen, Erste Banka chief economist Alen Kovac said in a quarterly macro outlook.

Croatia's gross domestic product (GDP) contracted by a real 0.5% on the year in the third quarter of 2014. In 2013, the country's GDP shrank by a real 1.0% after falling by 2.0% in the previous year.

In 2015, Erste expects Croatia's current account surplus to increase to about 1.0% of GDP as it continues to get a tailwind from the goods and services performance.

"Although the cost of transfers to EU budget weighed heavily on remittances in 2014, the current account balance has remained in positive territory," the report said.

On inflation, Kovac said he still sees a positive outlook with subdued pressures on both cost and demand sides. The anticipated average inflation in 2015 is 0.5%.

Erste notes that Croatia's fiscal consolidation process was once again halted in 2014 so the fiscal position continues to deteriorate.

The mid-term fiscal outlook lacks credibility and points to a deficit of 5.5-6.0% of GDP in 2015, the report added.