May 10 (SeeNews) - The World Bank said it has affirmed its forecast for Croatia's economic growth at 2.6% this year due to a slowdown in private consumption as the favourable effects of the tax reform on real wages start to fade.
Croatia ended 2017 with a growth of 2.8%, but prospects for reinitiating real convergence and promoting inclusive growth in the country are weak, the World Bank said in a Macro Poverty Outlook for Europe and Central Asia.
The lender commented that exports of tourist services in Croatia are expected to slow in 2018 due to capacity constraints. On the other hand, it said, better absorption of EU funds will give a boost to investment spending.
"These trends suggest an average economic growth of 2.8% for 2019 and 2020," the World Bank noted.
The government balance is expected to stay in surplus and may reach 1% by 2020, leading to a further decline in public debt to below 70% of GDP.
However, the bank cautioned, the overall fiscal stance will become moderately pro-cyclical, as the structural budget balance is expected to worsen.
Positive labour market developments are expected to support the growth of disposable income for all segments of the welfare distribution, while the continued decline in the share of long-term unemployed and NEETs will reduce the absolute poverty rate further to 4.0% in 2020, the World Bank said.
It warned that risks to growth are slightly skewed to the downside.
"As the operational restructuring of Agrokor Group unfolds in 2018, the negative effects on investment activity and private consumption might be greater than currently envisaged," the World Bank said.
In addition, although the positive contribution of exports of goods to GDP growth is expected to stay high, it is exposed to the risk of a slowdown in external demand from the EU. Also, the still high level of public debt makes Croatia vulnerable to interest rate shocks and worsening external financing conditions.
"Croatia’s prospects for improving higher and more inclusive growth remain weak," the World Bank added. It said that currently low potential growth calls for a strong structural reform agenda.
"Substantial economic, social and institutional weaknesses should be addressed to boost private sector productivity and competitiveness, raise the quality of human and physical capital and modernize public services," the bank also noted.
According to the World Bank, Croatia will see an inflation of 1.4% this year, down from 1.5% in 2017. Inflation is predicted to remain at 1.4% in 2019, before speedying up slightly to 1.5% in 2020.