The European Commission has revised upward Croatia's growth projection to 1.6% in 2023, and further to 2.3% in 2024, while the country's inflation is likely to wane to 6.9% this year and to 2.2% next year, the EC says in its Spring 2023 Economic Forecast, published on Monday.

It thus lifted Croatia’s growth outlook from 1.2% envisaged in the Winter interim Forecast for 2023 and from 1.9% for 2024.

Th EC projections are lower than those made recently by the government which now hopes that in 2023 the national economy will expand by 2.2% and by 2.6% in 2024.

European economy showing resilience

“The European economy continues to show resilience in a challenging global context. Lower energy prices, abating supply constraints and a strong labour market supported moderate growth in the first quarter of 2023, dispelling fears of a recession. This better-than-expected start to the year lifts the growth outlook for the EU economy to 1.0% in 2023 (0.8% in the Winter interim Forecast) and 1.7% in 2024 (1.6% in the winter),” says the EC.

“Upward revisions for the euro area are of a similar magnitude, with GDP growth now expected at 1.1% and 1.6% in 2023 and 2024 respectively. On the back of persisting core price pressures, inflation has also been revised upwards compared to the winter, to 5.8% in 2023 and 2.8% in 2024 in the euro area.”

Croatia’s wage growth backs private consumption, investment boosted by EU funds

Croatia’s GDP is set to grow by 1.6% in 2023 and 2.3% in 2024, the EC says in the section on the country, explaining that “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 real GDP growth is set to reach 1.6% in 2023 as the country takes advantage of its accession to the euro and Schengen areas.

In 2024, real GDP is expected to increase by 2.3%, driven by consumption and investment.

In 2022, Croatia’s real GDP expanded by 6.2% “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.”

“The labour market is expected to tighten further, with the unemployment rate reaching record low levels at the end of the forecast horizon.”

“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.”

HICP inflation to drop

The Harmonised Index of Consumer Prices (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.”

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.

According to the EC projections, Croatia’s 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.