The Croatian economy is forecast to grow by 6% in 2022, by 1% in 2023 and by 1.7% in 2024, while inflation is expected to reach 10.1% this year before slowing to 6.5% in 2023, the European Commission said in its Autumn Economic Forecast on Friday.
The Commission’s projections are slightly more optimistic than those of the Croatian government, which has projected a growth rate of 5.7% for 2002 and 0.7% for 2023 and an inflation rate of 10.4% for this year and 5.7% for the next.
The Commission revised up both the growth rate and the inflation rate for Croatia for this year. In its Summer Forecast, the Commission projected Croatia’s GDP growth rate at 3.4% and inflation rate at 8.2%.
Croatia’s growth rate in 2022 among highest in EU
According to the Commission’s estimates, the Croatian growth rate this year is among the highest in the European Union. Only Ireland (7.9%), Portugal (6.6%) and Slovenia (6.2%) are expected to have higher growth rates, while the Greek economy is forecast to grow at the same rate as Croatia’s.
Croatia’s public debt to GDP ratio is expected to drop from 78.4% in 2021 to 70% in 2022, to 67.2% in 2023 and to 68% in 2024.
The general government deficit is forecast at 1.6% in 2022, 2.4% in 2023 and 2.7% in 2024.
The unemployment rate is projected to decline from 7.6% in 2021 to 6.3% in 2022 and 2023 and to 5.9% in 2024.
Employment rate growth is expected to accelerate from 1.2% in 2021 to 2.2% in 2022 before decelerating to 0.2% in 2023 and 0.6% in 2024.
Last year, investment grew at a rate of 4.7%, while this year it is expected to jump by 9.4% before slowing down to 2.9% in 2023 and 3.2% in 2024.
“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,” says the EC.
“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.”
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 EC says.
“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%,” it added.
Impact of government measures estimated at 2.8% of GDP
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.
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.
EU growth in 2022 forecast at 3.3%
“After a strong first half of the year, the EU economy has now entered a much more challenging phase. The shocks unleashed by Russia’s war of aggression against Ukraine are denting global demand and reinforcing global inflationary pressures. The EU is among the most exposed advanced economies, due to its geographical proximity to the war and heavy reliance on gas imports from Russia. The energy crisis is eroding households’ purchasing power and weighing on production. Economic sentiment has fallen markedly. As a result, although growth in 2022 is set to be better than previously forecast, the outlook for 2023 is significantly weaker for growth and higher for inflation compared to the European Commission’s Summer interim Forecast,” the report says.
The Commission forecast the growth rate for this year at 3.3% in the EU27 and 3.2% in the euro area. Next year, economic activity is expected to be subdued, with a growth rate of 0.3% both in the EU27 and in the euro area. In 2024, growth expected to pick up to 1.6% in the EU27 and 1.5% in the euro area.
The Commission says that inflation has not yet reached its peak, which is expected later this year, and that it will ease next year. The inflation rate is forecast at 9.3% in the EU27 and 8.5% in the euro area in 2022, at 7% in the EU27 and 6.1% in the euro area in 2023, and at 3% in the EU27 and 2.6% in the euro area in 2024.