European Commission Slightly Raises Growth Estimates for Croatian GDP

The European Commission on Monday slightly raised its growth estimates for the Croatian economy for last year, this year, and next year, while maintaining its previous forecast that inflation will slow to 6.5% this year from last year’s 10.7%.

In its winter economic forecasts, the Commission estimates that Croatian GDP grew by 6.3% last year, will grow by 1.2% this year, and by 1.9% next year.

In the autumn economic forecasts published on November 11, 2022, the Commission estimated that Croatian GDP grew by 6% last year, will grow by 1% this year, and by 1.6% next year.

The growth of Croatian GDP last year was among the highest in the EU, after Ireland (12.2%), Portugal (6.7%), and Malta (6.6%). The average growth in the euro area was estimated at 3.5% last year, expected to be 0.9% this year, and 1.5% next year. This year, the growth of Croatian GDP is expected to be among the highest after Ireland (4.9%), Malta (3.1%), Romania (2.5%), Cyprus (1.6%), and Spain (1.4%). Next year, around 15 EU member states are expected to surpass Croatia in GDP growth, but growth will still be above the euro area average (1.5%) and in EU27 (1.6%).

The Commission estimates that inflation will fall to 6.5% from last year’s 10.7%. Next year, inflation is expected to drop to 1.6% according to the latest estimates. This year, inflation in Croatia is expected to be slightly above the average inflation in the euro area (5.6%), but next year it should be lower – inflation in the euro area is expected to be 2.5%.

The Commission emphasizes that Croatian GDP decreased by 0.4% in the third quarter of last year compared to the previous quarter due to a decline in investments and government spending in the context of stricter financing conditions, supply chain disruptions, and rising inflation.

– In the fourth quarter, mixed signals indicate broad stagnation, although a technical recession cannot be ruled out, as industrial production and retail are weak, but consumer and business confidence has begun to recover, especially in industry and services – states the Commission.

Overall, strong growth in the first half of last year is expected to enable a high growth rate of 6.3% in 2022, with domestic consumption being the main driver of growth, along with the external sector, which also had a positive contribution.

The growth this year, estimated at 1.2%, should be supported by joining the Schengen area and the euro area, which is expected to further reduce costs and barriers to trade and travel and assist in investments.

Geopolitical tensions and a weaker global environment are expected to affect external demand. In the second half of this year, a recovery in real incomes is expected due to lower energy and food prices and a still resilient labor market, which will contribute to a slight increase in household consumption.

Household Consumption Expected to be the Main Driver of Growth

Quarterly growth in 2023 is expected to gain momentum as the year progresses, inflation slows, and consumer confidence recovers. Household consumption is expected to be the main driver of growth, as a tight labor market contributes to higher wage growth in key sectors, such as hospitality.

Investments are expected to grow moderately, partly driven by incentives from European funds, while public spending is also expected to contribute to growth. Weaker external demand for goods and services, along with higher imports, is expected to negatively contribute to growth in 2023 and 2024.

Next year, wage movements and a reduction in inflation towards targeted values are expected to further stimulate domestic demand, while stronger activity in major trading partners should boost export growth. Due to dynamic public and private investments, imports are expected to remain high.

Inflation last year was higher than the average in the euro area, at 10.7% compared to 8.4%, but it was still lower than in most Central and Eastern European countries.

The main factors for relatively higher inflation in Croatia were the increase in prices in services, in the processed food sector, and in the non-energy industry. Inflation is expected to fall to 6.5% next year due to a larger decline in energy and food prices than previously expected. Next year, lower energy prices and a calming of food and service prices should bring inflation down to 1.6%, concludes the Commission.