Croatia’s gross domestic product is expected to grow by the second highest rate in the EU this year and remain among the highest for the next two years, while inflation is projected to decrease from this year’s 8.1% to 2.4% next year and to 1.67 in 2025, according to the European Commission’s autumn economic forecasts.
Croatia’s economy is expected to grow by 2.6% this year, which is the second highest growth in the EU, after Malta, whose GDP is expected to grow by 4%. Next year, growth is expected to slow to 2.5%, and in 2025, it is expected to accelerate to 2.8%.
The economy in the EU27 is expected to grow modestly at a rate of 0.6% this year, 1.3% next year, and 1.7% in 2025. Similarly, in the eurozone, growth is projected at 0.6% this year, 1.2% next year, and 1.6% in 2025.
– It is expected that Croatia’s GDP will grow at a steady pace, supported by increased personal consumption, rising real wages, and investments driven by EU funds – states the Commission.
Employment growth remains solid, expected to rise by 2.1% this year, and by 1.1% in the next two years. A record low unemployment rate is anticipated, with the unemployment rate expected to fall to 6.5% this year, to 6.2% next year, and to 5.8% in 2025.
Inflation is expected to ease, driven by lower energy and unprocessed food prices, while inflation in service prices remains more stubborn. The balance of the general government is likely to be negatively affected by significant wage increases in the public sector and social benefits that exert pressure on expenditures, adds the Commission.
Croatia’s economy grew strongly last year (6.3%) thanks to solid growth in private consumption despite high inflation.
Real GDP growth is expected to remain solid at 2.6% in 2023, supported by Croatia’s accession to the eurozone and the Schengen area.
Consumer demand is expected to remain high alongside growth in employment and real wages. It is projected that both government consumption and investments will positively contribute to growth, with investments largely supported by increased absorption of EU funds.
Net exports are expected to positively contribute to GDP growth as a reduction in goods imports offsets a smaller goods export, alongside overall strong tourist demand.
Growth Driven Mainly by Domestic Demand
Next year, growth of 2.5% will be mainly driven by domestic demand as overall inflation falls towards 2%.
The contribution of net exports is expected to decrease significantly but remain positive, supported by increasing demand in the economies of major trading partners.
In 2025, a broadly based growth of 2.8% is expected, also supported by increased absorption of grants and loans from the Recovery and Resilience Mechanism.
The main risk to economic prospects is a slower decline in inflation than expected, which is more persistent in Croatia than in much of the euro area.
If wage increases intensify, after already resulting in relatively higher growth in unit labor costs, it could lead to a wage-price spiral, and this risk could increase if pressures on wage costs are not absorbed through profits of companies that rose in 2022 and early 2023. In such a scenario, the trade balance could worsen due to strong growth in domestic demand, while price competitiveness could be jeopardized.
The employment rate is expected to continue to rise despite a slight decrease in the overall population.
Measures for the upskilling and reskilling of workers outlined in the National Recovery and Resilience Plan will assist workers transitioning to growing sectors.
It is expected that this year the inflation rate, measured by the Harmonized Index of Consumer Prices (HICP), will slow to 8.1%, fall to 2.4% next year, and to 1.6% in 2025, thanks to lower energy and unprocessed food prices partially offsetting ongoing, albeit slowing, increases in service and industrial goods prices.
Excluding energy and food, inflation measured by HICP is expected to be 8.3% this year, 3.5% next year, and 2.7% in 2025.
In these estimates, the Commission includes the effect of the assumed gradual phasing out of measures to mitigate the impact of high energy prices from the end of March 2024.
Due to strong economic growth and inflation last year, fiscal revenues increased significantly, helping to turn the deficit into a small surplus of 0.1% of GDP.
It is expected that large extra revenues in 2023, supported by continued strong economic activity and high inflation, will be offset by significant increases in wages and social benefits, which should result in a small general government deficit of 0.1% of GDP in 2023. In 2024, the deficit is expected to increase to 1.8% of GDP, due to further adjustments in public sector wages and social benefits, which will be higher than inflation, and due to a larger share of the national component in investments. Revenues from indirect taxes are expected to remain constant as a share of GDP, while direct taxes and contributions are expected to grow due to positive trends in employment and wages despite significant increases in tax exemptions.
The general government deficit from this year’s 0.1% of GDP is expected to increase to 1.8% in 2024 and 2025. The debt-to-GDP ratio is expected to fall significantly from 68.2% in 2022 to 60.8% in 2023. Public debt is projected to continue decreasing to 58.8% of GDP in 2024 and 58.2% in 2025. The reduction in the share of public debt in GDP occurs despite the increase in the deficit due to strong GDP growth.
