Croatia’s GDP is forecast to grow by 3.3% in 2024 and 2.9% in 2025, largely driven by strong household consumption. The labour market is expected to remain tight, with employment continuing to grow and the unemployment rate reaching new lows. Inflation is projected to continue its gradual decline over the forecast horizon. The general government debt is set to decline despite higher deficits.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | 3.1 | 3.3 | 2.9 |
| Inflation (%, yoy) | 8.4 | 3.5 | 2.2 |
| Unemployment (%) | 6.1 | 5.8 | 5.6 |
| General government balance (% of GDP) | -0.7 | -2.6 | -2.6 |
| Gross public debt (% of GDP) | 63.0 | 59.5 | 59.1 |
| Current account balance (% of GDP) | 1.2 | 1.1 | 1.0 |
Growth to pick up in 2024 amid increasing household consumption
Croatia’s real GDP grew by 3.1% in 2023 as a result of increasing household and government consumption, higher investment activity and a positive evolution of net exports. Private consumption was supported by significant real wages increases in the context of a tight labour market. Investment growth was underpinned by the rising absorption of EU funds, both under the Multiannual Financial Framework (MFF) and the Recovery and Resilience Facility (RRF). The decline of goods exports was more than offset by the growth of services exports and lower imports.
In 2024, Croatia’s GDP is expected to grow by 3.3%, also benefiting from the strong dynamism at the end of 2023. The main growth impulse should come from private consumption, boosted by continued real wage and employment growth, and stronger credit activity. Government consumption is projected to rise, mainly due to a comprehensive public sector wage reform that substantially aligned, but also increased, wage outlays. Investment growth is forecast to decelerate, also due to an expected temporary slowdown in the absorption of EU funds, with large disbursements under the 2014-20 MFF ending in 2023 (the final year of the cycle) and with the absorption of funds under the 2021-27 MFF accelerating only gradually. Increasing external demand is set to spur a progressive recovery in exports of goods, as exports of services, mainly tourism, continue growing at a slower pace. Due to higher growth of imports amid robust domestic demand, the contribution of net exports to growth is expected to turn mildly negative.
GDP growth is forecast to decelerate in 2025 to 2.9% as consumption growth momentum moderates on the back of slower private and public wage increases. At the same time, a pick-up in the absorption of EU funds, including from the 2021-27 MFF, and easing financing conditions should result in a moderate acceleration of investment activity. Goods exports are expected to strengthen further as demand from the main trading partners increases. However, supply constraints during the peak tourism season and possibly emerging price competitiveness losses are expected to slightly slow down the expansion of services exports. As imports decelerate with domestic demand, the external sector’s contribution to growth is set to turn marginally positive.
Risks to this outlook include further substantial wage increases that could foster stronger-than-anticipated private consumption growth, especially in 2024, but also trigger price pressures that would hurt exporters’ competitiveness, especially in 2025. Potential absorption capacity constraints could lead to a slowdown of EU funds intake, adversely affecting investment growth.
Labour market remains tight despite inflow of foreign workers
Strong economic activity and labour demand drove employment growth to 2.7% and the unemployment rate down to 6.1% in 2023. The tight labour market pushed up wages, which grew considerably also in real terms. Significant inflows of workers from non-EU countries contributed to easing labour supply shortages. Employment growth is projected to stay strong, although decelerating over the forecast horizon, with the unemployment rate reaching new lows and continued pressure on real wages.
Services inflation remains persistent
Headline inflation declined from 10.7% in 2022 to 8.4% in 2023, while inflation excluding energy and food increased from 7.6% to 8.8%. Headline inflation is expected to decelerate to 3.5% in 2024 and 2.2% in 2025, mainly due to the deceleration of processed food and non-energy industrial goods prices. Prices of services, driven by wage increases and strong consumer demand, including from foreign tourists, remain the most persistent inflation component. Inflation excluding energy and food is expected to remain above headline, at 3.8% in 2024 and 2.8% in 2025.
Declining public debt despite higher deficits
In 2023, the general government deficit increased to 0.7% of GDP. Revenue grew noticeably on account of high inflation, a good tourist season and strong wage growth in both public and private sectors. At the same time, expenditure increased significantly driven by wages, social assistance, interest expenditure and investments.
In 2024, the general government deficit is expected to increase to 2.6% of GDP, as the new public wage act and social assistance measures put further pressure on expenditure. Indirect tax revenue is set to grow amid solid nominal GDP growth and a good tourist season, while direct taxes are set to benefit from employment and wage developments despite the revenue-decreasing tax reform introduced in January. The government extended some of the energy-related measures until September 2024, with an expected budgetary cost of 0.6% of GDP in 2024 after 1.9% in 2023.
In 2025 the deficit is set to remain at 2.6% of GDP, as revenue is supported less by inflation while current and capital expenditure increase despite the complete phasing-out of energy measures.
In spite of the widening deficit, the debt-to-GDP ratio is expected to decrease from 63% in 2023 to 59.5% in 2024, due to robust GDP growth and debt-reducing stock-flow adjustments to take account of financial transactions. The latter includes the partial use of deposit reserves to repay part of the debt in 2024 (after higher deposits were recorded in 2023 due to some prefinancing of future debt repayments) and the accounting transactions following the delivery of military jets that were paid in previous years. In 2025, the debt ratio is forecast to decrease less strongly to 59.1% of GDP as nominal GDP growth slows down and the stock-flow adjustment is reduced.