Croatia was the fourth fastest growing economy in the EU and the leader of the CEE region in 2022

GDP growth in the fourth quarter of 2022 of 4.0 percent year-on-year is above expectations due to faster growth in investments and public consumption. The strong growth in investments (+9.6 percent), responsible for half of the overall growth rate, is influenced by the ‘waterfall’ of EU funds and the growing export orientation of the economy.

Namely, it encourages investments in competitiveness ahead of entering the euro area where competitive pressures on our companies are strengthening, as noted in the analysis by the Croatian Employers’ Association. Public consumption contributes to GDP growth by almost 50 percent, growing at a rate of +6.8 percent, reflecting record amounts of subsidies from the energy measures package along with increased co-financing of investments from EU funds. A budget surplus of about 1 percent of GDP allows for timely strengthening of public consumption, which undoubtedly acted stabilizing in the short term and prevented an even stronger slowdown in GDP growth.

Despite solid growth in the number of employed persons of about 2.5 percent in 2022, the growth in personal consumption of only 1.3 percent after an average of 6.8 percent during the previous two quarters confirms a strong decline in purchasing power. The growth in exports of goods and services is more than halved compared to the first nine months due to weaker foreign demand.

At the level of 2022, a real GDP growth of 6.3 percent was achieved with equally strong contributions from personal consumption and investments. The contribution of net exports (goods and services) is neutral despite significantly stronger growth in import prices than export prices, in the context of the energy crisis, significantly more expensive imports of energy and other raw materials, and a strong decline in foreign demand.

Overall, Croatia was the fourth fastest growing economy in the EU last year and the fastest growing economy in the CEE region with further strong qualitative improvement in the structure of GDP growth in favor of exports, especially goods. At this moment, HUP maintains its estimate of a slight decline in GDP this year of about 0.5 percent after a cumulative growth of 20 percent over the last two years.

Faster investment growth

Recently, a considerable number of analysts have published positive revisions of forecasts for the eurozone economy thanks to a strong decline in energy prices, significantly lower risks of energy consumption rationalization, and the recovery of the Chinese economy as the strongest driver of exports for many EU members.

In the upcoming HUP quarterly outlooks in the first half of April, the possibility of a positive revision of GDP movements for 2023 will be considered, especially after the extension of government measures to mitigate the energy crisis with a stabilizing effect on business operations and the purchasing power of citizens.

On the other hand, despite the recovery of economic optimism on the six-month horizon, the popular IFO Business Climate Index in Germany shows a worsened perception of the current state of the economy in line with the negative impact of inflation on the real purchasing power of the population, a downward trend in factory orders since last spring, and worsening financing conditions. Since last summer, the ECB has raised key reference interest rates by 300 basis points, to which an additional 150 basis points should be added by the end of this year.

With the first quarter of this year, HUP expects confirmation of the entry of the largest European economy, Germany, our foreign trade partner – into recession.

When we talk about positive impacts on the Croatian economy, the announcements from leading tourism operators for the upcoming season positively influence the year when entry into Schengen and the introduction of the euro enhance our comparative advantages. At the same time, the growth of tourism is limited by the decline in investments in capacities in recent years compared to pre-pandemic years, as well as strained energy and communal infrastructure.

Additionally, HUP expects an acceleration of investment growth to 7.5 percent thanks to the strengthening of EU fund inflows and further integration of Croatian companies into global value chains, during which investments in competitiveness should continue to be strengthened.