The Croatian central bank (HNB) has revised upwards the forecast of this year's economic growth to 6.8% from the previously forecast 5.9% thanks to a recovery in tourism activity, personal consumption and investment, it said on Wednesday.

Relatively favourable economic trends and the assumption that tourism has recovered have resulted in the HNB increasing its real GDP growth forecast, according to a press release after a meeting of the HNB Council.

This was the second time the HNB revised its forecast for this year. Last December, it forecast an economic growth of 4.9% this year, while in April, it revised the forecast to 5.9%.

Personal consumption is expected to recover this year thanks to the lifting of COVID restrictions and higher employment and wages, which is reflected in improved consumer optimism and the gradual recovery of consumer lending.

Intensified reconstruction in earthquake-affected areas and the absorption of funds from the EU’s recovery instrument is expected to significantly support a rise in investment which will make up for the reduced influx of funds from the 2014-20 EU budget.

Still, the HNB said, economic growth forecasts are exposed to pronounced negative risks due to uncertainties regarding the course of the pandemic and its possible effects.

The HNB has retained its inflation forecast for this year at 1.7%, while next year it could slow down to 1.5%.

The surplus on the current and capital accounts could increase noticeably this year, primarily thanks to the expected recovery of tourism revenue and intensified absorption of EU funds, the HNB said, adding that the surplus could mildly increase in 2022 as well. In line with that, the HNB expects the trend of improved foreign debt relative indicators to continue.

In the first half of 2021, the HNB continued to pursue a highly expansionary monetary policy, the press release said. Free banking monetary assets reached their highest level in June and this facilitated a reduction in financing costs and keeping most interest rates at historical lows.

Economic recovery is accompanied by a revival in lending, with corporate loans mildly increasing in the first five months of the year, while household loans went up considerably, mainly housing loans. The HNB said it would continue to support exchange rate and price stability as well as contribute to keeping up favourable domestic financing conditions.

Overall exposure to systemic risks in Q2 was kept at a high level.

Short-term risks in the non-finance sector have been reduced, also thanks to optimism that the pandemic will end soon and that the economy will recover faster. But there is still a lot of uncertainty due to new coronavirus variants and slower vaccination, which could result in new waves of the pandemic and new restrictions, keeping the risks in the government, non-financial private and financial sectors high.

On the real estate market, risks are increased due to price rises.

The liquidity and capital adequacy of credit institutions is still high and profitability mildly recovered at the start of the year.

At the end of Q1, credit institutions reported HRK 1.1 billion in profits, up 0.8% on the year.

The banking system capital rate was 25.1%.