Economic sentiment falls to pandemic level of 2020

Croatian inflation accelerated in April to 5.8 percent according to the national index, while the harmonized rate reached 5.4 percent, levels not seen for a long time. At the same time, surveys record a sharp decline in economic and consumer sentiment, while industrial production and retail trade are weakening. All of this together paints a picture of an economy entering a challenging period, as shown by the detailed PBZ Weekly Analysis.

Behind the inflation spike is primarily energy, whose prices rose by 17.5 percent year-on-year in April, with fuel alone accounting for two-thirds of that contribution. Service prices accelerated to 8.2 percent, while food price growth slightly slowed to 3.7 percent. PBZ analysts Ivana Jović and Ana Lokin indicate that the June round of macroeconomic assessments could bring a correction to the previous forecast of average harmonized inflation for 2026, which was 4.6 percent, and that correction could be upwards. The uncertain horizon of opening the Hormuz Strait, which affects global oil prices, combined with the upcoming tourist season and still solid domestic demand, leaves little room for optimism regarding inflation.

At the eurozone level, inflation accelerated in April to 3.0 percent from 2.6 percent in March, the highest level since September 2023. Here too, energy is the main driver as energy prices jumped from 5.1 percent to as much as 10.9 percent year-on-year. Core inflation, which excludes energy, food, alcohol, and tobacco, slightly fell to 2.2 percent, which is an encouraging signal, but analysts warn that a prolonged energy shock historically tends to spill over into service prices.

Regarding economic activity, the eurozone grew by only 0.1 percent in the first quarter of 2026, but this figure is largely distorted by a sharp decline in activity in Ireland of 2.0 percent. The rest of the eurozone excluding Ireland recorded growth of 0.2 percent, which is closer to the potential growth rate. However, it is concerning that surveys suggest a poor start to the second quarter. The European Commission’s economic sentiment index fell in April to a level last recorded in November 2020, during the full pandemic year, with the decline particularly pronounced in expectations for future demand and production.

In Croatia, available data for the first quarter painted a mixed picture. Industrial production fell by 2.4 percent compared to the previous quarter, and real retail trade turnover is slightly negative on a quarterly basis, although it records a year-on-year growth of 3.1 percent, partly due to last year’s consumer boycott that lowered the comparison base. Tourism remains a bright spot as arrivals and overnight stays at the start of the year grew by about 9 percent. The first estimate of Croatian GDP for the first quarter will be published by the Croatian Bureau of Statistics on May 28.

The economic sentiment indicator in April recorded a decline of 2.7 points, the largest month-on-month decline in the last two years, and the consumer confidence index returned to the level from February 2025, when consumer boycotts of retail chains were ongoing.

At the end of the week, neither the US Fed nor the European Central Bank changed interest rates. The Fed keeps them in the range of 3.50 to 3.75 percent, while the ECB remains at previous levels. PBZ analysts believe that markets are highly likely to correctly anticipate an increase in European interest rates at the June meeting, while remaining cautious for July. When it comes to the Fed, the next move is more likely to be a decrease rather than an increase in interest rates, but that space has narrowed, and if the energy shock does not ease quickly, a decrease could be delayed until 2027.