EC: Croatian GDP grows by 2.9%, inflation falls to 2.8% in 2026

European Commission has maintained its growth estimates for the Croatian economy for this and next year in its autumn economic forecasts, which remains strong, while inflation remains high this year and is expected to fall to 2.8 percent next year.

“Croatian gross domestic product (GDP) is expected to remain solid due to strong household consumption supported by rising real disposable incomes, but it will gradually slow from 3.2 percent in 2025 to 2.9 percent in 2026 and to 2.5 percent in 2027,” the autumn economic forecasts published by the Commission on Monday state.

Croatia ranks third in the EU for growth

The Commission had the same growth estimates for Croatian GDP in its spring economic forecasts for this and next year.

The Croatian economy continues to grow at a rate significantly faster than the EU and eurozone averages. Economic growth in the EU27 is projected to be 1.4 percent this year and next, while in the eurozone it is expected to be 1.3 percent this year and 1.2 percent next year.

The Commission forecasts only Ireland to have a higher growth rate than Croatia, with its GDP expected to grow by 10.7 percent, but this is a result of a large number of multinational companies in that country distorting the actual GDP data. After Ireland, Malta is expected to have the highest growth this year at 4 percent, Cyprus at 3.4 percent, and Croatia and Poland at 3.2 percent.

Further growth in employment is expected in Croatia, while the unemployment rate remains below 5 percent. Inflation is expected to remain high this year, fall to 2.8 percent next year, and to 2.2 percent in 2027.

The budget deficit is expected to be 2.8 percent this year, 2.9 percent next year, and again 2.8 percent in 2027, while the debt-to-GDP ratio will hover around 56 percent, 56.2 percent this year, 56.1 percent next year, and 55.9 percent in 2027.

EU funds boost investments

The growth of real wages and employment is increasing private consumption. Investments are expected to grow driven by increased absorption of EU funds, particularly from the Recovery and Resilience Facility. State spending is also expected to contribute to GDP growth as public sector wages increase.

The Commission predicts that goods exports will maintain momentum despite trade protectionism negatively affecting demand from some key trading partners. In contrast, real service exports are expected to decline slightly due to rising prices of tourist services, the Commission states.

A slowdown in GDP growth is expected in 2026 and 2027 due to a slowdown in consumption resulting from more moderate growth in real income. Investment growth is expected to continue at a somewhat slower pace after the funds from the Recovery and Resilience Facility are exhausted, while the drawdown of funds from other EU sources will continue to grow.

A reduction in the negative contribution of net exports to growth is expected, as competitiveness factors will limit price growth in the tourism sector.

As risks to these forecasts, the Commission cites the possibility that wage growth higher than expected could increase price pressure and reduce the cost competitiveness of exporters. Additionally, potential supply bottlenecks, particularly in construction, could delay the absorption of EU funds.

The Commission predicts that employment growth will slow during the forecast period, with expected annual growth of 2.1 percent in 2025, 1.5 percent in 2026, and 0.9 percent in 2027.

The labor shortage remains significant despite the increasing number of workers from outside the EU coming to Croatia. The unemployment rate is expected to reach record low levels, 4.7 percent this year, 4.5 percent next year, and then 4.6 percent.

Inflation is expected to rise to 4.3 percent this year from last year’s 4 percent as energy and food price inflation accelerates, while service inflation gradually decreases.

Deficit rises due to pensions

According to the Commission’s estimates, the general government deficit is expected to increase to 2.8 percent of GDP this year from 1.9 percent in 2024, driven by strong growth in social benefits, particularly pension expenditures, and a strong spillover of wage increases in 2024. Revenues from indirect taxes are expected to increase after solid nominal GDP growth, while direct taxes will benefit from employment and wage developments.

Next year, the budget deficit is expected to rise to 2.9 percent.

GDP and employment growth support the increase in tax revenues along with fiscal measures, such as the re-indexing of tax brackets and personal income deductions, as well as the gradual elimination of exemptions from health contributions for young workers and the removal of the temporary reduction in the VAT rate for natural gas, heating, pellets, wood chips, and firewood.

Regarding expenditures, the introduction of an annual supplement for pensioners will further increase pension expenditures, and public investments will remain at record high levels, but will lose momentum by 2027, the Commission states.