The projection of economic activity growth has not changed significantly compared to the last official projection, but the expected movements of the main components of GDP have changed, especially in 2023. Thus, a significant slowdown in growth (to 1.5 percent) is still projected for 2023, with more favorable movements in investments and exports of goods and services compared to the December projection, while personal consumption growth has been revised down to a low 0.5 percent, given the strong decline recorded at the end of 2022 and the outlook that consumption will remain subdued in the first half of 2023, according to HNB’s spring macroeconomic projections for Croatia.
In the second half of the year, a gradual recovery is expected due to the gradual increase in real wages in light of the expected decline in inflation and continued growth in nominal wages. Additionally, in 2023, employment is expected to continue to grow, but at a slower pace than last year.
On the other hand, favorable investment trends at the end of last year indicate the possibility that investment activity in 2023 could exceed previous expectations. State investments financed from EU funds could continue to contribute the most to growth, while private investments could be subdued due to rising financing costs.
Compared to the December projection, the growth of exports of goods and services has also increased due to more favorable expected movements in the countries that are Croatia’s main foreign trade partners and indicators suggesting that demand for tourist services could be stronger than previously expected. Thus, the growth of goods in 2023 has been increased to a mild 0.2 percent, from the previous 1.1 percent, while the growth of services has been corrected to nearly three percent, from 0.5 percent. These corrections also indicate a greater net contribution of foreign demand compared to the previous projection.
Assuming a gradual fading of price shocks and strengthening of external demand, growth could strengthen to 2.8 percent in 2024 and remain close to that level in the following year, with growth being relatively uniform when observing individual components.
Despite the decline in global energy and raw material prices, risks to economic growth remain pronounced, given the uncertainty regarding the development of geopolitical instability and the risks that inflation could be higher and more persistent than expected, which could prompt further interest rate hikes and negatively impact the movement of disposable income and consumption.
Risks related to inflation remain pronounced
After accelerating to 10.7 percent in 2022, inflation measured by HICP could amount to seven percent in 2023, which is 0.5 percentage points lower than the value from the previous projection. The annual growth of food prices and core inflation in November and December 2022 and January 2023 exceeded expectations from the previous projection, so in the current projection for this year, higher core inflation (7.7 percent compared to 6.7 percent from the previous projection) and stronger growth in food prices (9.7 percent compared to 7.7 percent from the previous projection) are expected.
On the other hand, the decline in energy prices and the new package of government measures that continue to limit electricity and gas prices have reflected a reduction in the projection of the annual growth rate of energy prices (to -1.4 percent compared to 10.5 percent from the previous projection). In 2024, a continuation of the slowdown in inflation is expected, so it could amount to 3.8 percent on an annual basis, which is 0.6 percentage points higher than the last projection.
In 2025, inflation could further slow down (to 2.2 percent, slightly higher than in the previous projection, when inflation of 2.1 percent was expected). Risks related to the inflation projection remain pronounced, but the risks of elevated inflation are becoming less dominant, and their relationship is becoming more balanced. On one hand, inflation could be higher in the case of higher energy prices in the global market, for example, due to the more pronounced impact of China’s reopening. This could directly spill over to consumer prices, for example, through increases in oil derivative prices and/or greater than assessed increases in administratively determined energy prices, and indirectly, due to the spillover of energy prices onto the prices of other goods and services. An additional risk is the possibility that wage growth exceeds expectations.
On the other hand, lower energy prices and other raw materials in the global market, a more pronounced slowdown in economic growth than current expectations or entering a recession, and stronger effects of the previous tightening of monetary policy than expected, as well as lower than expected inflation in major foreign trade partners, could contribute to a faster and more intense weakening of inflationary pressures.
Recovery of real wages
The expected movements of the main indicators of the labor market have not changed significantly compared to the last official projection, which is expected given the minimal revisions of the projection of real movements. The number of employed could increase slightly above expectations in the previous projection in 2023, and in 2024 slightly below expectations, reflecting primarily the revision of the expected movement of economic activity in the mentioned period.
At the same time, as in the previous projection, a gradual decrease in the unemployment rate is expected during the projection period, at a slightly slower pace than the increase in the number of employed, reflecting the growing role of employing retirees and foreign workers. Real wages, after a decline in 2022, are expected to gradually recover during the projection period.
The surplus on the current and capital account could amount to three percent of GDP throughout 2023, which is a significant improvement compared to 0.3 percent of GDP recorded in 2022. A balanced balance is expected on the current account (-0.1 percent of GDP), compared to a recorded deficit of 1.8 percent of GDP in 2022. The projected growth of the surplus primarily reflects the expected further growth of tourism revenues, then the growth of net inflows from the EU budget, and a noticeable reduction in net energy imports due to falling energy prices in the global market.
Conversely, rising interest costs on the foreign debt of domestic sectors, further deterioration of the deficit in goods exchange with abroad, as well as higher profits of banks and companies in foreign ownership, should act in the opposite direction. The projection of the surplus on the current and capital account has been significantly increased compared to the last official projection (by two percentage points).
This correction almost entirely reflects a significantly higher growth of tourism revenues than previously assumed, greatly contributed by favorable realizations of physical indicators at the beginning of the year, but also indicators of reservations for the main part of the tourist season. On the other hand, net energy imports were significantly higher in 2022 than expected.
Therefore, the expected decline in energy prices in global markets in 2023 has only mitigated the impact of unfavorable realizations from last year on expectations for this year. The projection of the surplus on the current and capital account of the balance of payments has been revised upwards for 2024 as well (from 0.6 percent of GDP in the December projection to two percent of GDP), according to HNB forecasts.
