EC: Croatian economy slows to 3.2 percent in 2025.

After a growth of 3.9 percent in 2024, economic activity in Croatia is expected to expand by 3.2 percent in 2025 and 2.9 percent in 2026, driven by strong household consumption. The labor market will be marked by the same trends, and the unemployment rate will remain below five percent. A slowdown in inflation is expected, reaching two percent in 2026. Following a significant increase in 2024, a further rise in the general government deficit is expected, reaching 2.7 percent in 2025. In the context of solid nominal GDP growth, the debt-to-GDP ratio is expected to fall to 56.3 percent in 2025, according to the Spring Economic Forecast of the European Commission for Croatia.

Slowdown

After a growth of 3.9 percent in 2024, a gradual slowdown of the Croatian economy is expected during the forecast period. Croatia’s exposure to the U.S. customs shock is low compared to other member states, and strong domestic demand is expected to ensure solid GDP growth despite increased trade-related uncertainty.

In 2025, GDP growth of 3.2 percent is expected, primarily driven by private consumption, supported by growth in real wages and employment. Investment growth is expected to continue, albeit at a slower pace, sustained by significant absorption of EU funds, particularly from the RRF. Government consumption is expected to grow alongside further increases in public sector employee benefits. Goods exports are expected to continue growing at solid rates, despite rising trade protectionism negatively impacting global economic activity and demand from some of Croatia’s main trading partners. On the other hand, services exports are expected to increase slightly in real terms, as the continuous rise in prices of tourist services burdens competitiveness. Given that imports exceed exports, the contribution of net exports to growth is expected to remain negative.

In 2026, a slowdown in economic growth is expected, but it will still reach 2.9 percent. Consumption growth is expected to slow as wage growth decelerates. Investment is expected to continue growing, albeit more slowly, further supported by increased absorption of EU funds. The contribution of the external sector to growth is expected to become less negative, as services exports gain momentum with expected more moderate growth in prices of tourist services, alongside solid growth in external demand.

Risks to these prospects include a greater-than-expected impact of uncertainty on private investment and consumption. Stronger wage increases than anticipated could increase price pressures and harm the cost competitiveness of exporters. Potential supply bottlenecks in construction could delay the absorption of EU funds.

As the labor shortage remains high, the influx of workers from non-EU countries continues. The unemployment rate is expected to reach new record lows of 4.6 percent in 2025 and 4.5 percent in 2026, as employment continues to grow, but a slowdown is expected during the forecast period. As a result, wage growth is expected to slow, both nominally and in real terms.

Total inflation is expected to decrease to 3.4 percent in 2025 from four percent in 2024, as energy inflation rises, while food and service inflation gradually declines. With continued moderation of wage and demand pressures, inflation is expected to slow more significantly and reach two percent in 2026. The decline is expected to be primarily driven by service and food inflation. The anticipated drop in international prices of energy commodities is expected to lead to only a small decrease in energy inflation as government measures on energy prices expire in October 2025. Inflation excluding energy and food is expected to fall from 4.8 percent in 2024 to 3.4 percent in 2025 and 2.4 percent in 2026.

In 2024, the general government deficit increased to 2.4 percent of GDP from 0.8 percent in 2023, driven by higher public sector wage expenditures and social benefits – particularly pensions. At the same time, revenues increased due to strong nominal GDP growth and favorable labor market developments.

EU Resilience

The European economy started 2025 with greater resilience than expected. This was stated by Valdis Dombrovskis, Commissioner for Economy and Productivity, commenting on the Spring Economic Forecast of the European Commission. Despite global uncertainty and trade tensions, the EU is expected to continue recording moderate growth this year, with an acceleration of growth expected in 2026. According to the European Commission’s forecast, the real GDP of the EU is expected to grow by 1.1 percent in 2025, while the eurozone grows by 0.9 percent. This growth will not be significantly higher than in 2024, but for Croatia, it could mean that the European market will continue to be a key source of growth and stability. For 2026, growth is expected to accelerate to 1.5 percent in the EU and 1.4 percent in the eurozone. Inflation in the EU, which was extremely high due to the pandemic and the war in Ukraine, is also decreasing, with a forecasted drop from 2.4 percent in 2024 to 2.1 percent in 2025 and 1.7 percent by 2026.

The EU economy recorded stronger-than-expected growth of 0.4 percent by the end of 2024, thanks to strong domestic demand. This positive trend continued in the first quarter of 2025, with preliminary data suggesting GDP growth of 0.3 percent. However, the forecast for further economic growth was revised downwards, primarily due to a deteriorated global trade situation and increased uncertainties in trade policy.

EU exports in 2025 are expected to grow by only 0.7 percent, a result of reduced global demand and trade tensions. However, a recovery is expected in 2026, with export growth of 2.1 percent. The EU economy is also expected to be affected by higher uncertainties in the domestic market, which will further complicate the economic recovery. Despite this, the forecast predicts that private consumption will increase by 1.5 percent in 2025 and 1.6 percent in 2026, thanks to a reduction in inflationary pressures and sustainable labor market dynamics.

Further growth in employment is expected in the labor market, despite moderate economic growth. In 2024, 1.7 million new jobs were created in the EU, and by the end of the forecast period, a further increase in employment by 2 million jobs is expected. The unemployment rate is expected to fall to a historically low level of 5.7 percent in 2026. Additionally, nominal wage growth will slow in 2025 and 2026, but workers will continue to enjoy increases in real wages and compensation for purchasing power lost during inflationary pressures.

Inflation will continue to decline, and it is expected to reach the European Central Bank’s target of 2% in the eurozone as early as 2025, while continuing to decrease throughout 2026. Prices of energy commodities, which have significantly fallen since autumn 2024, will also have a calming effect on inflation, and a strengthened euro will further contribute to this disinflationary process.

In terms of public finances, after the deficit in the EU fell to 3.2 percent of GDP in 2024, a slight increase to 3.3 percent is expected in 2025, with estimates that it will remain at that level in 2026. The public debt-to-GDP ratio in the EU is also expected to rise, from 83.2 percent in 2025 to 84.5 percent in 2026, after four years of faster reduction.

Risks to economic growth remain negative, and further fragmentation of global trade could negatively impact GDP growth and trigger inflationary pressures again. Climate disasters, which are becoming increasingly frequent, also remain a persistent source of risk for growth. On the other hand, the possibility of reducing trade tensions between the EU and the U.S., as well as accelerating EU trade with other countries through new free trade agreements, could support economic growth. Additionally, increased defense spending may have a positive effect on economic recovery.

The European Commission continues to work on strengthening the competitiveness of the EU through reforms, and a focus on deepening the single market, enhancing the Savings and Investment Union, and implementing an ambitious simplification program can further solidify the resilience of the European economy.