(Updates with fiscal deficit, public debt forecast in fifth, sixth paragraphs.)
Dec. 15 (Bloomberg) -- Croatia may slide into a recession next year as government spending cuts and the euro area’s debt crisis hit the Adriatic Sea nation’s economy, central bank Governor Zeljko Rohatinski said.
“Next year will be a very hard year, we don’t expect any growth, probably there will be a contraction,” he told reporters in Zagreb today. “A stronger fiscal consolidation will lead to lower growth. This is the price we need to pay to keep sustainable economic growth in the future.”
The central bank lowered its gross domestic product growth forecast this year to 0.4 percent from a previous estimate in October of 0.5 percent, while GDP next year may range from a contraction of 0.2 percent to a rise of 0.1 percent, he said.
The ruling Croatian Democratic Union was toppled on Dec. 4 by an opposition bloc led by the Social Democrats, which is expected to form a government by the end of the year. Premier- elect Zoran Milanovic said on Dec. 6 he will introduce fiscal measures within 50 days of taking office to bolster the country’s credit rating and avoid seeking international aid.
Should the new government “hesitate” with fiscal consolidation, “the things will only get worse,” Rohatinski said. The fiscal deficit could widen to 7 percent of GDP from an expected 6.1 percent this year, he said. Public debt in that case may jump to 75 percent of GDP from 51 percent, he added.
“Fiscal consolidation should be the first economic duty of the new government,” Rohatinski said. “It would also be a signal to markets that we are fiscally responsible, and we’d be able to keep a significant part of external financing.”
Croatia, which is preparing to become the European Union’s 28th member in July 2013, is taking longer than its Balkan neighbors to climb out of a two-year recession. Foreign direct investment dropped to $583 million in 2010 from $6 billion in 2008, while the government still needs to strengthen the labor market and the “business environment,” the European Commission said on Oct. 12.
The World Bank said this week that Croatia’s economy will slide into a recession in 2012 as Europe’s debt crisis hinders growth and the government delays cuts in state administration and spending. The Washington-based lender urged the new government to cut spending on public wages and social benefits, as well as to relax its labor legislation and strengthen tax collection from the gray economy.
--Editors: Alan Crosby, Douglas Lytle
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