Croatia’s GDP is forecast to grow by 6% in 2022 on the back of booming exports, investments and household consumption, benefitting from a recovery of tourism and other services. However, rising inflation and declining confidence amidst geopolitical tensions are deteriorating the economic outlook and public finances, affecting most notably 2023 and 2024. Subdued real wage growth and faltering demand from trading partners will depress private consumption and exports. The labour market is projected to remain resilient despite weaker employment growth and persisting labour shortages. A mild recovery of GDP growth is projected in 2024 as inflation moderates, real wage growth resumes and external demand starts to recover.
Last update (forecast)
Last update (11/11/2022)
|GDP growth (%, yoy)||13,1||6,0||1,0||1,7|
|Inflation (%, yoy)||2,7||10,1||6,5||2,3|
|General government balance (% of GDP)||-2,6||-1,6||-2,4||-2,7|
|Gross public debt (% of GDP)||78,4||70,0||67,2||68,0|
|Current account balance (% of GDP)||3,2||0,2||-0,6||-0,8|
Inflation and instability set to weigh on growth
Croatia’s economy is set to continue with strong, broad-based growth in 2022 (6%) on the back of a positive first half of the year. Booming goods exports and a recovery of tourism and close contact services, together with employment growth, supported household consumption, while both public and private investment picked up. However, persistently high inflation, negative real wage growth and a decline in business and consumer confidence are expected to lead to a technical recession in the last quarter of 2022 and the first quarter of 2023.
In 2023, although energy and commodity price growth are set to moderate, subdued real disposable incomes are projected to weigh on household consumption, especially in the first half of the year. Subsequently, as inflation moderates and real wage growth resumes, economic activity is expected to slightly recover. Investment growth is set to sustain import growth, while exports weaken as external demand deteriorates, leading to a negative contribution of net exports to growth in 2023. Real GDP is therefore forecast to expand by 1%, with government consumption and investment as the main drivers.
In 2024, real GDP is expected to expand by 1.7%. Private consumption is set to be the main driver of growth, backed by employment and a recovery in real wages. Investment and government consumption are expected to remain robust as RRF and European structural and investment funds continue to be absorbed. Both imports and exports of goods and services are projected to expand, on balance having a mildly negative contribution to growth.
The balance of risks to this forecast is tilted to the downside. Negative risks to the growth outlook relate to a stronger than expected negative impact of rising energy costs on companies’ viability and the impact of a possible new downturn in travel on firms in the tourism sector, which have still not fully recovered from the impact of the pandemic. On the upside, Croatia’s comparatively diversified supply of gas and a continuation of nearshoring processes by companies in Croatia’s key trading partners could benefit the external position.
Resilient labour market in the face of headwinds
After a dynamic 2022, employment growth is set to decelerate to 0.2% in 2023 due to a slow-down in demand, uncertainty and lagged effects of rising input costs. The unemployment rate is projected to remain at 6.3% next year, benefitting from the entry into force of the labour market reform and the deployment of new active labour market policies in the green and digital transitions, with a particular focus on the long-term unemployed and other disadvantaged groups. In 2024, the assumed mild acceleration of economic activity is expected to push the unemployment rate down to 5.9%.
Inflation to moderate over the medium term
HICP inflation is forecast to remain high and above the EA average in 2022 and 2023, reaching 10.1% and 6.5%, respectively, as the increases in energy and commodity prices pass through to core inflation. Price caps and reduced indirect taxes, together with strong base effects, are expected to moderate inflation in 2023. In 2024, negative energy inflation in particular is projected to push the inflation rate lower towards the euro area average.
Fiscal adjustment stifled by inflation and uncertainty
After a reduction to 2.6% of GDP in 2021, the general government deficit is forecast to reduce further to 1.6% in 2022, driven by the phasing out of COVID-19-related measures and strong nominal growth supporting government revenues. On the revenue side, indirect tax receipts are expected to grow despite tax cuts, backed by strong economic activity and high inflation, while direct taxes and contributions are set to benefit from rising employment and nominal wages. Meanwhile, the phasing out of COVID-19-related support measures and further savings on debt servicing costs are projected to curb expenditure growth.
The government adopted several measures to mitigate the impact of high energy prices for households and companies. In addition to permanent cuts in VAT rates on energy products, authorities introduced temporary price-related measures like cuts in excise duties and price caps on electricity and gas. The impact of these measures, envisaged to be in force through March 2023, is estimated at 2.8% of GDP.
The deficit is projected to increase to 2.4% of GDP in 2023 as measures to support households and companies take effect and the economy slows down. The deficit is projected to increase further to 2.7% in 2024, as the pressures to preserve the adequacy of public wages and social transfers push up government expenditure.
The debt to GDP ratio is expected to drop significantly from 78.4% in 2021 to 70.6% in 2022, due to the strong nominal GDP growth and debt-reducing stock flow adjustments. The debt ratio is expected to drop further in 2023 (67.8%), before edging up to 68.8% in 2024 as the deleveraging is halted by modest nominal GDP growth, rising deficits and reversing stock-flow adjustments.