HUP: Profitability of Croatian Companies 53 Percent Below EU Average

Croatian companies in 2024 recorded a decline in profitability to a level of 53 percent below the average of the European Union and 25 percent below the average of Central and Eastern Europe (CEE), according to the latest analyses from the Croatian Employers’ Association (HUP). With an industrial productivity decline of -1.4 percent over the last two years – compared to a growth of 2.8 percent in the CEE region – it is alarmingly clear that the Croatian economy is losing competitiveness.

HUP notes that a reduction in the tax wedge on wages (42.4% in 2025), linking the increase in the minimum wage to productivity growth, and reducing the cost of sick leave borne by companies is necessary, considering the significant drop in the share of industrial companies complaining about labor shortages (below 10% of surveyed companies).

Additionally, it should be understood that reciprocal tariffs will worsen the competitiveness of countries with above-average overall tax burdens if the calculation includes, for example, high VAT, excise duties, or corporate tax, HUP adds.

Given that the European industry is losing energy competitiveness compared to the USA, energy-intensive manufacturing companies continue to show below-average poor results, and some companies, such as ABS Sisak, have been forced to suspend production due to excessively high electricity costs, it is essential to implement models to reduce energy costs.

In this regard, the European Action Plan for Steel anticipates the expansion of compensation for indirect CO₂ costs arising from trading emission allowances within the EU ETS system. Germany, France, Belgium, and the Netherlands are already implementing this form of support, covering up to 75 percent of indirect CO₂ costs for industries at risk of ‘carbon leakage’. Sectors such as steel, aluminum, chemicals, and cement are particularly affected by high energy costs and depend on such measures to remain competitive against producers outside the EU, making it essential to prevent the relocation of production from the EU to countries that do not have similar regulatory requirements and costs associated with emissions.

Croatia should follow this proposal from the European Commission and establish a compensation system, along with an analysis of financial and regulatory options in accordance with EU state aid rules. Ensuring budgetary resources for the implementation of this measure is crucial for preserving the competitiveness of the domestic industry and preventing the loss of production and jobs, HUP writes in its weekly analyses.

HUP Coordination of Large Electricity Consumers advocates for further reductions in fees for renewable energy sources (RES). Although the current program for reducing electricity consumption fees is valid until the end of 2028, further reductions in existing fees (40%, 60%, or 75%) are needed, along with a reduction in consumption below the current 500 MWh, due to improved investments in RES and the expansion of sectors eligible for reduced RES fees. Currently, about 200 companies in Croatia are entitled to reduced fees under the existing model.

Energy Prices Higher Than Elsewhere in the EU

In light of the volatility of energy prices, the Government has extended the Regulation on the Removal of Disturbances in the Energy Market, protecting citizens, micro, small, and medium-sized enterprises, while large companies have been paying electricity prices above the EU average for two years.

Most EU member states protect their economies through more competitive electricity prices, so the business sector across the European Union pays a lower electricity price than households. Slovenia recently joined this trend, having abolished electricity price subsidies for citizens as of March 1, 2025, resulting in utility costs rising by 10-15 percent.

Interestingly, before this price increase, Slovenian households paid 42 percent more for electricity than Croatian citizens. Slovenian companies, on the other hand, paid 16% less for electricity than Croatian companies last year. Slovenia temporarily kept electricity prices for households low during the years of the energy shock, so during 2022 and 2023, but only temporarily, citizens paid a lower electricity price than companies. Last year, they abandoned this measure, so wholesale buyers (companies) pay a lower unit price than retail buyers – households.

Croatia should follow the EU trend and gradually align household electricity prices with market conditions, while continuing subsidies for socially vulnerable categories of citizens, encouraging competition and innovation in the energy market, and finally unblocking investments in renewable energy sources (RES), where about 2,600 MWh of capacity has been waiting for a connection decision from HERE for almost three years.

The Government has decided to increase compensation for electricity suppliers from 120 EUR/MWh to 140 EUR/MWh for the period from April 1 to September 30, 2025, with HUP continuously emphasizing that limiting compensation below market prices threatens market liquidity, reduces competition, and encourages monopolistic practices. This decision is an important step towards ensuring market balance and fair compensation for all participants. We welcome this change and continue to advocate for the gradual removal of price regulation and further development of competitiveness in the energy market, in accordance with EU legal acquis, HUP notes.

Production Growth

Despite a 5.4 percent increase in industrial production in February – following a 7.6 percent increase in January and a 5.4 percent increase in December – there remains a deep polarization among sectors. Strong growth is recorded in the production of transport equipment, computer equipment, and processed metals, while energy-intensive sectors such as textiles, chemicals, and metal industries continue to decline.

Regarding the share of Croatian goods exports to the USA, pharmaceuticals lead (40%, 320 million EUR), electrical equipment (19.1%, 154 million EUR), and metal products (16.4%, 132 million EUR).

The negative impact of the USA’s ‘retaliatory’ tariffs on our production is also reflected in the rising prices of raw materials whose production in the EU has decreased or is nearly nonexistent, leading us to import from the USA. A striking example is the import of polyethylene, a raw material for plastic packaging production, which is increasingly produced in the USA, Asia, Saudi Arabia, and Egypt due to significantly cheaper energy, allowing it to be returned to the EU at up to 30 percent lower prices, HUP notes.

In 2025, we expect industry growth of about 3 percent, due to the recovery of foreign demand and a slight improvement in financing conditions in the second half of the year, while the uncertain consequences of tariffs and rising energy prices and labor costs are the main risks for our industry. The relatively modest recovery should be viewed in the context of the weak recovery of major trading partners and current forecasts indicating that the eurozone will grow by barely 0.5-1 percent this year, and we must wait until 2027 for a complete real recovery of goods exports. However, the production of capital goods is one of the most potent areas given the enormous fiscal stimuli (such as 500 billion EUR in Germany) aimed at financing the defense industry and infrastructure, conclude HUP.