This report reviews key macroeconomic data and microeconomic developments for Croatia published between September 4 and October 7, 2014.

In the period, the EBRD confirmed the Croatian economy is expected to decline by 5% this year, while Raiffeisenbank analysts said they believe the contraction could reach even 0.8% and result in the public debt share in GDP rising to 72% by end-2014, way above the EU limit. The Croat central bank also admitted this year’s GDP drop might be bigger than its 0.2% forecast.

Moreover, Hypo Bank analysts warned that the country might not be able to exit the recession next year, projecting a 0.5% GDP decline for 2015 as well. This would mean a seventh consecutive year of recession for Croatia, while reports already emerge about the government’s plans to cut public sector wages in 2015.

To support the fears, Erste Bank also released some figures for Croatia, suggesting an economic stagnation for next year. And this could easily turn into recession as unemployment remains high, domestic demand subdued, while the EU economy shows slower signs of recovery.

The report provides details on Croatia’s worsening economic sentiment in September 2014, on the plans of its largest insurer to lay off 500 workers, and on the potential relaunch of several privatisations including lender HPB and Croatia Airlines.

The report also contains information on new loans from the World Bank and from its private sector arm - the IFC. It also speaks about the next stage of the tenders for a EUR 100mn tourism project and for construction works on motorway corridor Vc. As usual the latest events in the INA-MOL case are included as well as some reports that INA might close down one of its two refineries in Croatia.

Key points:

• CPI fell 0.3% y/y in August after edging down by 0.1% y/y in July. Retail sales managed to inch up 0.3% y/y in real terms in August after falling 2% y/y in July thanks to a monthly gain of 1.8%.

• Industrial output increased by just 0.2% in the first eight months of the year following a 4.7% y/y drop in August alone. In January-August the sole gainer is the manufacturing industry, even though it stagnated in August, while the mining and the utilities sectors registered declines.

• The unemployment rate continued to decline in monthly terms in August to 17.5% from 17.8% in July, 18.3% in June and 19.66% in May. Most likely the bigger demand for workers in the tourism sector is the main reason for the drop. The average net monthly wage rose by a real 0.6% y/y in July after climbing 1.7% y/y in June.