The European Commission on Monday revised upward the forecast of Croatia's economic growth in 2022, 2023 and 2024, while keeping the previous forecast that inflation will decrease from 10.7% in 2022 to 6.5% this year.

In the Winter 2023 Economic Forecast, the Commission estimates that Croatia’s GDP grew 6.3% in 2022 and that it will grow 1.2% this year and 1.9% in 2024. In the previous, autumn forecast, it put GDP growth at 6% in 2022, 1% this year and 1.6% in 2024.

Croatia’s GDP growth last year was among the highest in the EU after Ireland (12.2%), Portugal (6.7%) and Malta (6.6%). This year, too, it should be among the highest after Ireland (4.9%), Malta (3.1%), Romania (2.5%), Cyprus (1.6%) and Spain (1.4%), while next year 15 member states are forecast to surpass Croatia’s GDP growth, which should still be above the 1.5% euro area and the 1.6% EU average.

Regarding Croatia’s inflation, the Commission forecasts that it will fall to 1.6% in 2024, below the 2.5% average expected in the euro area, from 6.5% this year, above this year’s 5.6% euro area average.

“Croatia’s GDP contracted in the third quarter of 2022 (-0.4% quarter-on-quarter) due to declining investment and government consumption in a context of tighter financing conditions, supply chain disruptions and rising inflation,” the Commission said.

“In the fourth quarter, mixed signals point to a broad stagnation although a technical recession cannot be ruled out, as industrial production and retail trade weakened but consumer and firms’ confidence started to recover, especially in industry and services.”

“Overall, the strong first half of the year is expected to allow Croatia to reach 6.3% real GDP growth in 2022, with domestic demand being the main driver of growth, but the external sector also contributing positively,” the Commission said.

“In 2023, real GDP is forecast to grow by 1.2% supported also by the accession of Croatia to the euro and Schengen areas, which is expected to further reduce costs and frictions to trade and travel and support inbound investments.”

Geopolitical tensions and a weaker global environment, the Commission said, “are set to weigh on external demand. Real incomes are expected to start recovering in the second half of the year, benefiting from lower energy and food inflation and a still resilient labour market, supporting a mild increase in household consumption.”

Quarterly growth in 2023 is set to gain momentum as the year advances, inflation decelerates and consumer confidence recovers, the Commission said, adding that household consumption is expected to remain the most important contributor to growth as a tight labour market triggers higher wage growth in key sectors, such as hospitality.

“Investment is set to expand moderately, driven partly by the impulse of EU funds, while public consumption is also expected to add to growth. Weaker external demand for goods and services, coupled with higher growth in imports, is projected to contribute negatively to growth in both 2023 and 2024.”

In 2024, the Commission said, “wage developments and the reduction of inflation towards target are expected to further support internal demand, while stronger activity in the country’s main trading partners is set to boost export growth. Dynamic public and private investments are expected to sustain imports over the forecast horizon.”

Inflation averaged 10.7% in 2022, above the euro area average (8.4%) but still below most EU central and eastern European countries, the Commission said.

“Stronger inflation in services, processed food and non-energy industrial goods are the main factors behind this relatively higher inflation rate. In 2023, base effects and a steeper decline in energy and food prices than previously expected are set to lower inflation to 6.5%,” the Commission said, adding that in 2024, “the negative contribution of energy prices, as well as the moderation of food and services prices, is forecast to bring inflation down to 1.6%.”