The European Bank for Reconstruction and Development (EBRD) has more than doubled the growth forecast for Croatia's economy in 2022, but it also forecasts a significant slowing down of economic activity in 2023 due to the expectation of poor demand in the euro area and the gas crisis.

The EBRD now expects Croatia’s GDP to grow by 6.5%, thus raising its May forecast by 3.5 percentage points, shows a report released on Wednesday.

In 2023 the economy is expected to slow down strongly, with a forecast growth rate of merely 2%, 1.5 percentage points down from the EBRD’s May forecast.

Croatia’s economy has fully recovered from the coronavirus pandemic in 2021 when GDP grew by 10.2%, with a strong contribution from personal consumption, exports and investments, says the EBRD.

In the first half of 2022 activity grew strongly again, by 7.4%, again spurred by domestic demand and exports. Personal consumption remained strong despite the average drop of real wages of 1.9%, however, consumer confidence weakened due to rising inflation, according to the EBRD.

In Q3, key support to growth and budget revenue is expected to come from tourism, considering the weakening of consumption and investments.

The EBRD believes the significant decline in growth in 2023 is connected with weak demand from the euro area.

The EBRD also notes that Croatia is relatively protected from a potential shutdown of energy imports from Russia because its energy sector is mostly state-owned, pointing to an appropriate share of renewables and access to alternative sources of supply via the LNG terminal on the island of Krk.

Crisis spillover

According to the latest projections by the EBRD, Croatia is expected to record higher growth rates than other Central European and Baltic countries.

The Czech Republic and Latvia are expected to record the lowest growth in 2023, of 0.5% and 0.8% respectively.

In the entire Central European and Baltic region the EBRD now expects economic activity to grow by 3.7% in 2022, half a percentage point more than forecast in May.

In 2023, economic growth in the region is expected to slow down abruptly to 1.3%, which is a drop of as much as 2.1 percentage points compared to the May forecast, due to gas supply disruptions and the spillover effect of slower growth in the more developed parts of Europe, notably Germany and Austria.

Growth has already started slowing down in Q2 under the pressure of sudden price hikes, notably of energy and food, currency depreciation and decline in external demand, drought and the tense geopolitical situation, says the EBRD.

Governments have introduced measures to reduce the burden of energy costs for households although in the short term they could annul the effect of efforts to improve energy efficiency, the bank notes, including among the unfavourable factors increasingly frequent droughts that affect farm yields and poison rivers.

A cold winter ahead?

The EBRD underlines the high degree of uncertainty of economic forecasts, noting that they depend on how long energy prices will stay high and whether governments will ration gas consumption if Europe is left without Russian gas.

For the entire region where it operates the EBRD now forecasts growth of 2.3% in 2022, changing its May forecast upward by 1.2 percentage points owing to a wave of post-pandemic spending.

The forecast for 2023 has been revised downward by 1.7 percentage points to 3%, shows the EBRD report, entitled “A cold winter ahead?”.

These are very worrying times for the EBRD regions and for many developed economies. As the winter approaches, the economic price of the Russian war against Ukraine is becoming clearer every day, EBRD chief economist Beata Javorcik said.

Inflation may not have reached its peak in EBRD regions because in many countries consumer prices are still not entirely reflecting the increase in producer costs and the high price of natural gas, she warned.