Croatian's economy continued to grow in the first half of this year, despite rising inflation and the risk of stagflation in Europe, analysts at Raiffeisenbank Austria (RBA) said, adding that they expect GDP growth to reach 3.9 percent in 2022 and 3.0 percent in 2023.

“Growth is widespread and led by domestic demand, while at the same time the positive effects of exports are being reduced by strong growth of imports. Solid growth of the service sector is evident, which, spurred by accumulated savings and positive expectations of the tourism sector, is managing to mitigate the slowdown of economic activity in other areas”, state agency Hina quoted the RBA report on Wednesday.

The real sector is facing increasing cost pressures, as well as disruptions to global supply chains, as a result of which inflation in Croatia in May reached a record 10.8 percent on the year.

“The peak of inflation is ahead of us and will remain at historic highs during the summer months. A slowdown is possible only towards the end of the year due to the effect of the base period, but we do not expect a return to rates of 2 percent before the end of 2023,” RBA Chief Economist Zrinka Zivkovic-Matijevic said in a press release.

The real wage growth has entered negative territory, and in conditions of historically low unemployment and growing employment, the pressure to increase wages will grow.

“Even though at the beginning of the year, our growth forecast for 2022 seemed optimistic, current data and expectations that we will manage to reach the historically successful tourism year 2019 put the current projections to risks of upward revision,” the press release said.

On the other hand, the possibility of the euro area and Central European countries going into recession at the end of the year, stronger inflationary pressures, an unfavorable impact not only on disposable income but also on consumer and business optimism, as well as the impossibility of implementing investments within the National Recovery and Resilience Plan, would result in a noticeably lower rate of growth in 2023.

“Geopolitical developments, especially those related to the war in Ukraine and Russia’s potential counter-sanctions against Europe, which would include the suspension of gas flows and the continuation of strong price growth with a simultaneous recession or weak growth in Europe, have a great impact on the negative risks,” according to RBA analysts.

RBA expects the positive impact of Croatia joining the euro zone on 1 January 2023 in terms of credit rating.

“Elimination of the currency risk will result in the raising of the credit rating, according to our expectations, from at least two rating agencies,” the press release said.

For Croatia, this represents an opportunity, “but not a guarantee for the realization of significant benefits,” analysts added.

“In itself, the expected monetary stability, elimination of currency risk and relatively lower interest rates bring benefits, but not necessarily prosperity and resistance to internal and external shocks. Moreover, if monetary stability is complacently exploited and used as a substitute for a disciplined and sustainable economic policy, a member state can easily fall into the trap of exposing itself to excessive vulnerability, which we could see not so long ago in the case of Greece”, concluded Zrinka Zivkovic-Matijevic.