The latest figures show that the recession in Croatia was halted in the middle of 2010 and that a recovery has begun.

In 2011 the economy is expected to grow by 1.5 per cent, in 2012 it will go up 2.1 per cent, while this year will end with a drop of 1.8 per cent, according to the European Commission's Economic Forecast 2010-2012, published on Monday.

"Recent data indicate that the recession bottomed out around mid-2010 and that a recovery has begun. Most notably, industrial production has started to show an upward trend," the EC says in its projections of economic growth which are published twice a year, in the spring and in the autumn.

The EC gives forecasts for all EU member-countries, candidate countries and several leading world economies.

"Retail trade has also increased on a year-on-year basis. Net exports, which had already softened the recession, are apparently continuing to contribute positively to GDP growth in the second half of this year."

This year GDP will see a drop of 1.8 per cent. The economic recovery will result in an annual growth of 1.5 per cent in 2011 and of 2.1 per cent in 2012, the EC says.

The main generators of the modest growth are private consumption and investment, and circumstances favouring growth are the recovery being faster than the expected recovery in the EU, and the approaching membership of the EU which, among other things, includes a stronger inflow of foreign direct investment. A possible negative circumstance is dependance on foreign funding. The delay in fiscal consolidation may hurt both investment and consumption via higher borrowing costs, the EC says.

Although economic activity seems to be gathering some momentum, it is unlikely that the economy will return to pre-recession growth rates of more than 4 per cent annually, at least in the short term.

The main generators of the pre-recession growth were domestic demand, large capital inflows and strong credit growth. "But the global financial and economic crisis hit the economy hard, particularly in 2009, when GDP dropped by 5.8%," the EC says.

According to its forecast, this year's budgetary deficit will reach 5.7 per cent of GDP and there is little chance that it will narrow significantly over the next two years.

The upcoming parliamentary elections constitute a major hurdle for near-term rebalancing, the EC says.

It is projected that the deficit will widen somewhat in 2011 before falling back to around the current level in 2012 when the recovery will boost tax revenues more decisively. The general government debt is set to increase sharply from around 35% in 2009 to almost 50% in 2012, according to the forecast.

Exports grew in the first half of 2010 while imports continued to decline. Physical indicators of tourism in the 2010-season have been strong. There are signs of an upturn in consumer confidence. Private consumption is getting some impetus from the gradual lifting of the so-called "crisis tax" which was imposed in 2009.

The unemployment rate grew from 9.1 per cent in 2009 to 12.4 per cent in the second quarter of this year, and the annual unemployment rate for this year could reach 12.5 per cent. Next year the unemployment rate is expected to stop growing and in 2012 unemployment could drop to around 11 per cent.

Over the next two years inflation could go up from one per cent, the rate in mid-2010, to around two per cent, according to the forecast.