Last update (15/05/2023)
Croatia’s GDP is set to grow by 1.6% in 2023 and 2.3% in 2024. Continued real wage growth and decelerating inflation are projected to support private consumption, with investment getting a boost from European funds and increased confidence. The labour market is expected to tighten further, with the unemployment rate reaching record low levels at the end of the forecast horizon. Headline inflation should moderate despite persistent services inflation, which is expected to keep core inflation above headline. The general government balance is expected to deteriorate as the indexation of public sector wages and social benefits boosts spending.
|GDP growth (%, yoy)||6,2||1,6||2,3|
|Inflation (%, yoy)||10,7||6,9||2,2|
|General government balance (% of GDP)||0,4||-0,5||-1,3|
|Gross public debt (% of GDP)||68,4||63,0||61,8|
|Current account balance (% of GDP)||-0,2||0,7||1,1|
Household consumption to sustain growth as inflation decelerates further
Croatia’s real GDP expanded by 6.2% in 2022 largely thanks to a strong first half of the year despite headwinds related to record high inflation, supply side bottlenecks and tighter financing conditions for firms and households. The energy price shock and its pass-through to other goods and services affected the purchasing power of households as the year advanced, with inflation outpacing wage growth. Still, private consumption remained the main growth contributor supported by a steep decline in the household’s savings rate. The external sector had a mildly negative impact on growth, as booming exports of goods and services were offset by strong import growth.
In 2023, real GDP growth is set to reach 1.6% as the country takes advantage of its accession to the euro and Schengen areas. Headline inflation is projected to subside, mainly on account of energy and commodity prices, while continued employment and wage growth are projected to sustain private consumption. Government consumption is projected to continue contributing positively to growth, while investment should be supported by increased confidence and absorption of EU funds. The terms of trade shock suffered in 2022 is set to reverse during the year, leading to a trade balance improvement. Overall, growth should be broad-based across domestic demand components, while the contribution of net exports to growth should be mildly negative.
In 2024, real GDP is expected to increase by 2.3% driven by consumption and investment. As inflation drops towards the 2% target level and labour market shortages persist, stronger real wage gains should boost private consumption, while absorption of funds under the Recovery and Resilience Facility should positively contribute to growth. Rising imports and increased demand from Croatia’s main trading partners are set to result in a neutral contribution of the external sector to GDP growth.
Risks to the outlook are tilted to the upside. Stronger export market share gains and a better tourist season could turn the external balance more positive than expected, while investment could overperform on account of accelerating renovation efforts and improving investor sentiment. On the negative side, higher inflation could materialise as labour shortages push wages up and rising house prices (17.3% annual growth rate in the last quarter of 2022) spill over into rents.
A tight labour market supports real wage growth
The labour market performed well in 2022, with employment expanding by 2.3% and surpassing pre-pandemic levels. Construction and trade, transport, accommodation and food services made the biggest gains, supported by the increase in the inflow of foreign workers. The unemployment rate edged down to 7%, the lowest in the last 13 years. Strong wage growth in the face of decelerating inflation is set to lead to mild real income gains already in 2023, with the unemployment rate dropping to 6.6%. The labour force should continue growing despite a slight drop in total population. In 2024, the pick-up in activity is set to reinforce employment growth. Upskilling and reskilling measures are expected to help workers transitioning to expanding sectors.
Services inflation more persistent than anticipated
HICP inflation is projected to drop to 6.9% in 2023 and 2.2% in 2024 as decreasing energy prices partly offset the persistent price growth in services and non-energy industrial goods. Consequently, core inflation is set to outpace headline inflation at 8% in 2023 and 3% in 2024. The forecast incorporates the effect of the energy measures, set to be phased out as of September 2023.
Asynchronous impact of inflation boosts revenues in 2022 and spending in 2023
In 2022, fiscal revenues grew markedly on account of both real growth and strong inflation. This supported the return of the general government balance to a surplus of 0.4% of GDP in 2022.
In 2023, the surplus is expected to turn into a deficit of around 0.5% of GDP, as increased price levels impact expenditure through indexation of public wages and social expenditure. Indirect tax revenue is set to grow despite the temporary tax cuts, backed by still solid nominal GDP growth, while direct taxes and contributions are set to benefit from employment and wage developments. The phasing out of the COVID-19 support measures is offset by energy measures. Meanwhile, debt servicing costs should remain contained as the interest rates – although rising – remain below those of maturing debt, and the share of EU-issued debt, at below-market rates, increases.
The budgetary cost of the energy support measures is projected in the Commission 2023 spring forecast at 1.5% of GDP in 2023, compared with 1.6% in 2022. The Commission assumes the cost of energy support measures at 0.2% of GDP in 2024. The government approved a capital increase in the state-owned energy company (HEP) of EUR 0.9 billion to finance energy price caps.
The deficit is projected to widen to 1.3% of GDP in 2024 as preserving the adequacy of public wages and social transfers pushes up spending even as energy measures are phased out.
The debt ratio is expected to drop significantly from 68.4% in 2022 to 63% in 2023, due to GDP growth and debt-reducing transactions (stock‑flow adjustment). The decrease will subside in 2024 to 61.8%, as GDP growth slows, deficits reappear and the stock-flow adjustment is reversed.