Croatia's political weaknesses will slow growth

Significance

Inflation seems to have returned to the economy following three years of near-continual deflation. After years in the doldrums, the Croatian economy is finally experiencing respectable growth and various indicators are now pointing in the right direction. However, the recovery is based on short-term factors that cannot easily be sustained, and the foundations of the economy remain weak.

Impacts

• The current spate of growth is helping to prop up a weak government and a socio-economic model to which many Croats are averse.
• Respectable growth has lifted business confidence in the third quarter to its highest level since 2009.
• Apparent economic convergence with the rest of the EU is reviving the question whether and when Croatia should adopt the euro.