In recent years, there is probably no more thankless job than that of an analyst. Things around us, with deep consequences for the economy, are changing so rapidly that forecasts do not even have time to take hold in the projected period before new ones must be crafted. However, some economists have focused on the day after tomorrow, not just tomorrow, and are publicly asking what will happen to our growth once we exhaust the generous European funds.
The pandemic recovery funds (along with Greece, we know, the most abundant) catapulted our growth (after a decline of 8.4 percent in 2020, we grew an incredible 13.1 percent in 2021) and since then we have been growing almost the fastest in the Eurozone. But what happens when the lights of EU funds go out? What will be our growth driver? Tourism is reaching its (infrastructure) capacity limits, fund money has mostly been injected into state projects, least of all into the private sector, budget expenditures, therefore, and financial pressure on companies are rising along with unquenchable inflation, export demand is seriously declining (not just in Germany), the EU simply does not know the way out of stagnation, and geopolitics further complicates the situation. So, Croatia will grow after 2027… how exactly?
Analysts at Raiffeisen Bank say that until the end of the decade, things are not bleak; by 2027, the outlook remains favorable, with average growth rates between 2.5 and 3 percent, thus around the potential growth rate.
– From 2027 to 2030, despite the end of the RRF, it should be noted that European funds from the Multiannual Financial Framework of the EU for the period 2021-2027 can still be used for another three years, which ensures support for the continuation of both private and public investments. Of course, rates, especially those we have seen in the past two years, are not likely. Growth in 2025 should continue to be led by personal consumption and investments; however, with a more modest dynamic than before, so our projected growth rate of 2.9 percent will also depend on net foreign demand or the intensity of recovery in demand from important foreign trade partners, where the outlook at least in 2025 is not optimistic. Additionally, the current structure of industrial production and commodity exports (low share of high-tech and medium-high-tech intensive products), as well as service exports, where tourism and transportation services still primarily dominate, do not suggest a significant contribution to stronger growth rates.
Growth estimates remain significantly higher than projected movements for the Euro area and suggest further real convergence of Croatia, from the current 75 percent of the EU average per capita (according to purchasing power parity) to over 80 percent in the medium term. However, to achieve relatively high growth rates, further convergence, i.e., reaching Euro area standards, it is necessary to implement reforms, increase competitiveness, and structurally change sources of growth. Therefore, the weaknesses and greatest challenges facing economic policy makers in the medium to long term remain strengthening the rule of law, demographic trends, relatively low productivity, and low labor force participation rates. In such an environment, economic policy makers, along with responsible fiscal policy, must prioritize the timely fulfillment of measures and reforms from the NPOO, which, along with merely drawing available funds, have a much greater significance in terms of implementing structural reforms, which are also prerequisites for OECD membership – RBA concludes, emphasizing that only in this way can resilient, stable, and sustainable growth be ensured.
Unfavorable External Factors
Alen Kovač from Erste Bank says that in the next year or two, we will grow at around the estimated three percent. – Such dynamics suggest a continuation of faster growth compared to the EU average and continued convergence of GDP levels to the EU average, reaching 80 percent of the EU average. The structure of growth, with a certain slowdown compared to 2024, should still reflect strong trends in domestic demand, primarily personal consumption. We expect a similar dynamic in investments, where this year and next year we can still count on a significant inflow of funds from the Recovery and Resilience Fund. Fragile economic growth at the EU level, without a doubt, remains an important factor not only for Croatia but also for other countries in the region and, unfortunately, a complicating circumstance for the upcoming period.
This is clearly reflected in the fluctuating data in the industrial production segment with a volume decline of about three percent in 2024, while in commodity exports we are recording a certain recovery compared to 2023. If we look at the industry a little deeper than just the production rate, we can see that at the end of last year, the utilization of production capacities in the domestic industry was at 80 percent, which is almost six percentage points above the level of utilization in the pre-crisis period at the end of 2019. At the same time, most countries within the EU are recording a decline in capacity utilization during the mentioned period – Kovač points out, adding that the weakening of foreign demand was also visible in tourism, as the number of overnight stays remains close to pre-pandemic levels, and data from the balance of payments indicate stagnation in tourism revenues.
– When we talk about a somewhat longer horizon, if external growth factors remain unfavorable, Croatia cannot remain isolated, although it is not isolated now, and it is clear that internal growth generators also have their limits. Geopolitical circumstances, the strengthening of protectionism, and rising political risks are all factors that will continue to keep the level of uncertainty elevated. These circumstances, besides export potential, also leave a mark on the willingness of the private sector to invest. There is a lot of talk about EU money, and it should be noted that the availability of funds has its dynamics, so with the end of certain financing programs, there is also a fluctuation in the inflow of EU money, and this is a pattern that has been observed in other CEE countries.
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Although the inflow of money is likely to decrease after 2026, Croatia will still remain one of the countries with the largest amounts of funds available (through the regular multiannual financial framework). The more important question is to what extent current investments of EU money will result in strengthening the long-term growth rate; the end of the decade will provide us with more details on this. When it comes to tourism, it is evident that domestic policymakers are trying to influence changes within the tourism offer through new tax changes towards raising quality rather than increasing the quantity of the offer. Such changes can be characterized as structural, and time will show how successful we have been in this. It is certainly important to emphasize the importance of structural reforms and improving the investment climate, the importance of investing in segments that would raise productivity and competitiveness of the economy – says Kovač.
Deep Misconception
However, if the share of the state in the structure of investments is increasing, and the state part is growing mostly due to EU money, perhaps the cessation of inflows by the end of the decade is not such bad news. On the other hand, in the next five years, the world can turn upside down several times, during which inflation, which is only good for state budget revenues, can further inflate. And when it comes to inflation and its impact on the overall picture, RBA says that it is not always bad news. Namely, along with pressures from rising input costs (energy), strong tourist demand, high employment, and rising wages, as well as consumer optimism above the long-term average, there has been an extremely strong growth in domestic demand and an increase in service prices.
– They have made the main contribution to the overall growth of consumer prices in the past year. Faster price growth in Croatia has therefore resulted in relatively strong convergence towards the Euro area average by almost six percentage points (in terms of overall price levels) in three years (2022-2024). The average inflation rate in 2026 is expected to fall slightly below two percent, which should continue into 2027. Thus, assuming no shocks, with the continuation of price convergence, medium-term projections foresee a similar price growth dynamic in the Euro area and Croatia from 2027 onwards. Besides internal factors such as the intensity of domestic demand, the most significant external factors still include geopolitical risks that could, for example, disrupt the efficiency of supply chains again. Possible indirect effects of trade policies of the new administration in the U.S. should also not be overlooked – RBA analyzes.
So, when everything is summed up and subtracted, we know that we have no idea what will drive growth. Companies will manage on their own, as they did after the 2008 crisis, but there will be no productivity growth – and that is the only link by which we pursue competitiveness, and thus exports – without trimming budget expenditures. Anyone who thinks that the causes and solutions to inflation lie in supply chains is deeply mistaken.
