Forecast from Brussels: Croatia Enters a Period of Slower Growth

The Croatian economy is beginning to slow down, as indicated by the regular autumn economic forecast from the European Commission. Although the domestic economy remains stable, last year’s GDP growth of 3.8 percent will not be repeated. Real GDP, according to the Commission, will continue to grow, but at a rate of 3.2 percent in 2025, 2.9 percent in 2026, and 2.5 percent in 2027. The main driver of the still solid growth, as referred to in Brussels, remains strong domestic demand, growth in real wages and employment, and investments supported by EU funds. However, they also state that the end of the Recovery and Resilience Mechanism will gradually slow down investment dynamics.

Inflation Slowdown

The Commission forecasts that inflation will also begin to slow down next year. This year, it will amount to 4.3 percent, primarily due to rising food and energy prices, and will then decrease to 2.8 percent in 2026 and 2.2 percent in 2027. Inflation in services and food will gradually weaken, while energy is expected to rise again due to the cessation of state support measures in 2026 and the introduction of the ETS2 system in 2027. Inflation excluding food and energy will drop from 4.8 percent in 2024 to less than two percent by the end of the period.

Further growth in employment is expected in the labor market, but weaker than before: 2.1 percent in 2025, 1.5 percent in 2026, and 0.9 percent in 2027. The unemployment rate will remain at historically low levels, at 4.7 percent in 2025, followed by 4.5 percent in 2026 and 4.6 percent in 2027. All of this will be accompanied by a continued influx of labor from third countries and a gradual easing of pressures on wage growth.

General Government Deficit

However, the Commission notes another change, the deterioration of fiscal trends. The general government deficit will rise to 2.8 percent of GDP in 2025, then to 2.9 percent in 2026, and slightly decrease to 2.8 percent in 2027. The reasons are the growth of social benefits, especially pensions, the strengthening of the wage mass in the public sector, the abolition of tax reliefs, and the growth of public investments. Despite this, the ratio of public debt to GDP remains stable, at 56.2 percent in 2025, 56.1 percent in 2026, and 55.9 percent in 2027, thanks to strong nominal economic growth.

The external balance will remain negative: the current account balance is estimated at minus 2.9 percent of GDP in 2025 and minus 3.2 percent in 2026 and 2027. Imports will grow faster than exports, partly due to increased international travel by the population, while the export of services will weaken due to higher prices of tourist services, but a recovery is expected towards the end of the period.

Overall, the forecast indicates stable but gradually weaker growth, easing inflation, historically low unemployment, and fiscal risks associated with rising expenditures and larger deficits. However, there are enough reasons for caution as the end of the use of funds from the RRF and the transition to slower EU funds will further slow down investment dynamics, which represents a key structural challenge for the period after 2026, the Commission warns.

EU Slowing

As Croatia enters a period of more moderate growth, a similar situation is expected across the European Union. According to the autumn forecast, the EU is expected to grow by 1.4 percent annually in 2025 and 2026, with a slight acceleration to 1.5 percent in 2027. The Eurozone follows this growth with slightly lower rates; 1.3 percent in 2025, 1.2 percent in 2026, and 1.4 percent in 2027.

Inflation in the Eurozone is expected to be 2.1 percent in 2025, and then stabilize around two percent, while in the entire Union it will remain slightly higher, potentially reaching 2.2 percent by 2027. This continues the gradual easing of price pressures, although some components of inflation, particularly energy, depending on the ETS2 system, are exposed to increased volatility.

In the global environment, the EU faces growing uncertainty in trade policy. U.S. tariffs, which are at their highest levels in the last hundred years, with a main rate of 15 percent and numerous sectoral exceptions, disrupt trade patterns and encourage the redirection of Chinese exports to Europe. At the same time, the EU still has a relative advantage in the U.S. market due to lower effective tariffs, although it is expected that the contribution of net exports to GDP growth will remain negative in 2025 and 2026, before stabilizing in 2027.

Private consumption in the EU is recovering more slowly than expected, partly due to increased household savings, but during the forecast period, it should grow steadily at around 1.5 percent annually. Investments, driven by fiscal stimulus in Germany and accelerated use of funds from the Recovery and Resilience Mechanism and cohesion funds, are expected to strengthen in 2026, before a slight slowdown in 2027.

The labor market remains strong. The EU is expected to record employment growth of 0.5 percent in 2025 and 2026, with unemployment projected at 5.9 percent in 2025 and 2026, falling to 5.8 percent in 2027. The slowdown in employment growth combined with faster GDP growth means a slight recovery in productivity, while wage growth gradually weakens.

Significant Differences

The fiscal position of the Union is deteriorating. The EU general government deficit is expected to rise from 3.1 percent of GDP in 2024 to 3.3 percent in 2025 and 2026, and then to 3.4 percent in 2027, due to rising defense expenditures, higher interest costs, and slow fiscal adjustments. The debt ratio in the EU is projected to be 85 percent of GDP by 2027, with an even more unfavorable trend in the Eurozone, which could reach 91 percent. Differences among countries remain significant: by 2027, four member states will have debt exceeding 100 percent of GDP.

Overall, the EU is entering a period of modest growth, slowed potential, and gradual fiscal deterioration, along with trade uncertainty and structural challenges that will pressure investments and exports.