Three key trends for Croatian companies in 2023: prolonged stagnation, adaptation to climate change, and the digital iron curtain

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The global consulting firm Kearney, in a study titled ‘Convergence of Acute and Urgent Threats’, identified five key trends shaping the global perspective: prolonged stagnation, adaptation to climate change and ESG standards (environment, society, governance), the digital iron curtain and the so-called splinternet, a renaissance of nuclear energy, and the rise of deepfakes.

Here, the first three trends are very important for the Southeast European (SEE) region, making timely and appropriate responses from companies necessary.

The year 2022 was shaped by numerous disruptions that continue to bring uncertainty this year. Companies in the Southeast European region, specifically in Croatia, must pay special attention to three trends and respond accordingly to prevent potential negative impacts on their business.

– We expect that business in the Southeast European region will be shaped by a prolonged period of stagnation, the growing importance of solutions for adapting to climate change and the ESG agenda, as well as the emergence of a digital iron curtain due to changing data protection and privacy regulations. Companies that timely recognize risks and take appropriate measures will gain an advantage in a world characterized by “hypertransformation” – emphasizes Marko Derča, a partner at Kearney.

The economic consequences of COVID, ongoing supply chain disruptions, increased protectionism, and the war in Ukraine have resulted in high inflation, the normalization of monetary policy, and initiated a period of low growth and low investment.

The eurozone economy has shown great resilience and will continue to grow modestly in 2023 despite a decline in GDP. The energy crisis will remain key in short-term plans and pose a threat to energy-intensive subsectors that are becoming increasingly uncompetitive. Inflation is expected to start declining on an annual basis from 2024 onwards, driven by measures affecting energy and food prices. However, core inflation is likely to prove more persistent.

After GDP growth in 2022, Croatia, along with the rest of the eurozone, is entering a period of stagnation that depends on inflation trends and labor shortages.

– In Croatia, a slowdown in growth is expected, driven by inflation in food prices, rising energy costs, and a reduced number of tourist arrivals compared to pre-pandemic years. Additionally, the labor shortage is felt in the labor market, with an unemployment rate of 6.4 percent. The stagnation of economic growth could alleviate the labor shortage and demand for industrial goods. Compared to regional competitors, Croatia is a country with high economic risk, which has affected a 15 percent decline in foreign direct investment at the end of last year. However, the introduction of the euro could change this and accelerate integration into regional financial markets – says Derča.

The impacts of climate change are increasingly felt worldwide, and the need to create solutions for adapting to climate change is growing. Although significant commitments from governments and the private sector are needed, financial investments remain low, with as much as 90% of global financial flows directed towards climate change mitigation. Solutions are crucial for the Southeast European region, as Central Europe and the Balkans are expected to experience the highest possible temperature increases. Accordingly, companies are paying more attention to environmental, social, and governance (ESG) programs to mitigate the growing pressure from consumers and broader stakeholders.

– The ESG program is a hot topic, as evidenced by the trends of private equity funds entering the SEE region. Funds are looking for companies that follow ESG standards to achieve premiums that are up to 100% higher in low-emission industries. In this way, new opportunities are also opening up for companies. By integrating ESG into every investment, companies can become more attractive to investors and reduce financing costs. Furthermore, ESG standards bring many opportunities for innovation and differentiation in the fight against stagnation – believes Derča.

Data privacy protection is becoming increasingly important, as around 70 percent of countries have valid data privacy laws. Given the continuous growth of e-commerce, domestic and foreign companies will have to keep pace with changing data privacy regulations. Data protection laws pose many challenges for small and medium-sized enterprises entering new markets, as legal compliance requires many financial and non-financial resources.

Data is becoming a facade in geopolitics, while online dynamics follow economic and geopolitical fragmentation in the physical world. Growing protectionism encourages the emergence of a digital iron curtain. The internet is becoming a splinternet with fragmented architecture, and costs for companies relying on the state model are rising. For example, Russia is enforcing data localization laws and penalizing companies like Google and Pinterest for failing to store data on Russian citizens on local servers.

The lack of compliance with data privacy legislation stifles the free flow of cross-border data and leaves economic consequences. Non-compliant laws will continue to create barriers for smaller companies and emerging markets. To remain competitive, companies in Croatia must elevate their data strategy and data management to a higher level.

The future of the global economy in 2023 remains uncertain. A decrease in inflation is expected in the second quarter. Meanwhile, the world is slowly adapting to the consequences of the conflict in Ukraine by accelerating the energy transition and bringing nuclear energy back into focus. Information coming from the digital space is becoming unreliable due to the rise of deepfakes, increasing the importance of good data governance.

– During the period of economic expansion, significant differences have emerged between average and top companies. Those companies that have managed to master efficiency have gained an advantage in consolidating industries during the period of stagnation and are emerging from stagnation as winners – concludes Derča.