The Croatian economy could grow by 1.2 percent this year, while inflation could reach 7.5 percent, it was said on Monday at a presentation of the latest RBA analysis "Monetary Tightening and Fiscal Easing".

RBA analysts revised down their earlier estimate of GDP growth for 2023, from 1.8% to 1.2% and raised their forecast of inflation from the earlier 6.7%.

Zrinka Zivkovic-Matijevic, chief macroeconomist at Raiffeisen Bank (RBA), pointed out that even today’s data from the Bureau of Statistics on the decline in industrial production and consumption in retail trade in December confirmed that the economy is slowing down.

Notably, industrial production fell on an annual level for the second month in a row, this time by 2.4%, while retail trade fell by 0.8% year on year.

Solid labour market

Zivkovic-Matijevic said that the decline in household consumption would be even greater, but Croatia has a solid labour market, with the registered unemployment rate at the lowest level in history, amounting to 6.8%, with continued employment growth.

However, she underlined that the labour market is increasingly facing a labour shortage, which is being filled with workers from third countries, who submitted around 129,000 job applications last year.

When it comes to GDP, RBA forecasts that Croatia’s economic growth in 2022 will be 6.3%, while this year will definitely see a slowdown, regardless of external factors such as the energy crisis, the war in Ukraine and the slowdown of the economy.

Zivkovic-Matijevic said that Croatia entered 2023 with a GDP that is about 10% higher in real terms compared to the pre-pandemic period.

Increasing dependence on tourism

In 2023, the growth of all GDP components is expected to slow down, except for investments, which should mainly be supported by European funds, both from the new Multiannual Financial Framework and the National Recovery and Resilience Plan.

These funds represent not only an opportunity to mitigate the unfavourable consequences of the slowdown in other GDP components but also an opportunity to make the economy more resilient and sustainable, the RBA analysis said.

On the other hand, although the positive tourism results are encouraging, Zivkovic-Matijevic warned that Croatia’s dependence on tourism is increasing, so it is necessary to work on diversifying the economy and strengthening the industry.

It is estimated, however, that revenues from the consumption of non-residents will reach €13 billion in 2022, she said.

Double-digit inflation rates will remain throughout the first quarter

The estimated inflation rate of 7.5% this year is significantly higher than a long-term average, and the return of rates to around 2% on the month is not expected before 2025, said Zivkovic-Matijevic.

Double-digit inflation rates in 2023 should be maintained throughout the first quarter, after which a gradual easing should follow, provided there are no specific shocks, she added.

According to preliminary estimates presented by Zivkovic-Matijevic, inflation in January could increase by 13.5% year-on-year.

It is expected that the European Central Bank (ECB) will continue raising interest rates, and according to RBA’s estimates, they will increase by 50 base points in February and March, and by 25 base points in May and June.