Last update (15/11/2023)
Croatia’s GDP is expected to grow at a sustained pace, supported by increasing private consumption amid rising real wages, and by investment boosted by EU funds. The labour market is set to tighten further, with employment recording solid growth and the unemployment rate reaching record-low levels. The expected moderation of headline inflation is driven by lower energy and unprocessed food prices, while services inflation is projected to remain more persistent. The general government balance is set to be negatively impacted by large increases of public sector wages and social benefits putting pressure on expenditure.
|GDP growth (%, yoy)||2,6||2,5||2,8|
|Inflation (%, yoy)||8,1||2,4||1,6|
|General government balance (% of GDP)||-0,1||-1,8||-1,8|
|Gross public debt (% of GDP)||60,8||58,8||58,2|
|Current account balance (% of GDP)||2,4||2,5||3,1|
Household consumption to sustain growth
Croatia’s economy expanded strongly in 2022, supported by solid private consumption growth, despite high inflation, and by the build-up of inventories.
Real GDP growth is expected to remain solid at 2.6% in 2023 as Croatia takes advantage of its accession to the euro and Schengen areas. This is also thanks to high carry-over from 2022 and despite a weaker momentum in the external environment. Consumer demand is set to remain high amid employment and real wage growth. Both government consumption and investment are projected to contribute positively to growth, with investment largely supported by increased absorption of EU funds. However, a deceleration in inventories’ build-up is expected to firmly weigh on domestic demand. Net exports are projected to positively contribute to GDP growth as a decrease in goods imports more than offsets lower goods exports, and amid overall strong tourism demand. The terms-of-trade shock suffered in 2022 is set to partly reverse during the year, leading to a further trade balance improvement.
In 2024, real GDP is expected to grow by 2.5%, mainly driven by domestic demand as headline inflation falls towards 2%. The contribution from net exports is set to decrease substantially but remain positive, supported by increasing demand in the main trading partner economies. Growth in 2025 is forecast to reach 2.8% and remain broad based, also supported by the increased absorption of RRF grants and loans.
The main risk to the economic outlook is a slower-than-expected decline in inflation, which has been more persistent in Croatia than in most of the euro area. Should wage increases intensify, after having already resulted in comparatively higher unit labour costs growth, they could lead to possible wage-inflation spirals. This risk may be exacerbated if wage cost pressures are not absorbed by firm profits, which increased in 2022 and early 2023. Under such scenario, the trade balance could deteriorate amid strong domestic demand growth, while exports cost competitiveness could be endangered.
A tight labour market supports real wage growth
The labour market performed well in 2022, with the unemployment rate falling to 7.0%, the lowest in decades, while the inflow of foreign workers intensified. Strong wage growth amid a tight labour market is expected to generate considerable real income gains in 2023, with the unemployment rate dropping further to 6.5%. The labour force should continue growing despite a slight decline in total population. Employment growth is projected to persist in 2024 and 2025, although at a slower pace, bringing the unemployment rate to new record lows. Upskilling and reskilling measures envisaged in the RRP are intended to help workers transitioning to expanding sectors.
Services inflation more persistent than anticipated
HICP inflation is projected to soften to 8.1% in 2023, and drop to 2.4% in 2024 and 1.6% in 2025 as decreasing energy and unprocessed food prices partly offset persistent, although decelerating, price increases in services and industrial goods. HICP inflation excluding energy and food is expected at a somewhat higher 8.3% in 2023, 3.5% in 2024 and 2.7% in 2025. This forecast incorporates the effect of the assumed phase out of measures to mitigate the impact of high energy prices as of end of March 2024.
The general government balance back to deficit while debt continues declining
In 2022, fiscal revenue grew markedly on account of strong real growth and inflation, helping turn the deficit into a small surplus of 0.1% of GDP. High windfall revenues in 2023, supported by continued strong economic activity and high inflation, are expected to be more than offset by high increases in wages and social benefits. This is set to result in a small general government deficit of 0.1% of GDP in 2023.
In 2024, the deficit is expected to widen to 1.8% of GDP, affected by further upward adjustment of public wages and social benefits beyond inflation and higher nationally-funded investment. Indirect tax revenues are set to remain constant as a share of GDP, while direct taxes and contributions should benefit from positive employment and wage developments despite significant increases in tax exemptions. Measures to mitigate the (economic and social) impact of high energy prices are set by law to stay in place until end of March 2024. The total (net) budgetary cost of energy-related measures is expected to decrease from 1.8% of GDP in 2023 to 0.5% in 2024. Meanwhile, debt servicing costs should remain contained as the interest rate differential on rolling debt is still favourable until the end of the forecast horizon.
The deficit is projected to remain at 1.8% of GDP in 2025 as revenue growth normalises and wage and social benefits remain high, driven by previous years’ indexation.
The debt-to-GDP ratio is expected to drop significantly from 68.2% in 2022 to 60.8% in 2023, supported by GDP growth and debt-reducing stock-flow adjustments. Public debt is forecasted to continue decreasing, reaching 58.8% of GDP in 2024 and 58.2% in 2025. This decrease is mainly due to strong GDP growth, while the deficit increases and stock-flow adjustments are projected to reverse.