Croatia

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT

Moderate growth supported by private investment

In 2024, growth will remain moderate and will be driven by private consumption (58% of GDP). It will be supported by the resilience of the tourism sector, benefiting from entry into the Schengen area and the adoption of the euro. It will also be encouraged by employment growth (unemployment rate at 6.5% in April 2023) and wage gains due to persistent labour shortages in Croatia. While the slowdown in price increases will help strengthen household purchasing power, the expiration of government energy support measures scheduled for March 2024 will maintain inflationary pressures above EU targets. Although positive, growth prospects will also be subject to the European economic situation as the economic downturn in European countries (the provenance of most tourists) could weigh on the economy. Additionally, growth will be supported by investment and reforms carried out within the European Union's Recovery Fund. The EUR 6.3 billion in grants available from 2021 to 2026 will allow Croatia to continue its investments, particularly in energy diversification, digital innovation, and transportation infrastructure. The expansion of the liquefied natural gas (LNG) terminal on the island of Krk and the construction of a new gas pipeline section between the cities of Zlobin and Bosiljevo, which began in late 2023, will also enable the country to facilitate its gas supply and increase exports to Slovenia and Hungary.

Mild twin deficits are expected to persist

After a modest surplus in 2022, 2023 saw the return of a slight budget deficit, primarily due to the EUR 1.7 billion in energy subsidies provided by the government to help households and businesses cope with rising energy prices and support the development of renewable energy. The deficit is expected to persist in 2024, as the removal of energy subsidies scheduled for March 2024 will not be sufficient to offset increased spending related to pension indexation and public sector wage hikes. Additionally, revenue is anticipated to decrease due to fiscal changes such as an expansion of income tax exemption and a reduction in social contributions.
Simultaneously, the current account deficit will be sustained by the large trade deficit due to the country's dependence on imports, especially energy. However, the surplus in the services balance, though insufficient to offset the deficit in the balance of goods, will persist due to the resilient tourism industry. The current account deficit is easily financed by EU fund transfers and foreign direct investments (FDI), particularly in the construction and services sectors (tourism).

Relations between the President and the Prime Minister will remain strained as elections approach

The Prime Minister, Andrej Plenkovic, leader of the conservative Croatian Democratic Union (HDZ) party, governs the country with a coalition formed with two liberal parties – the Croatian People's Party (HNS) and the Reformists – and the support of eight deputies from ethnic minorities, totalling 66 seats out of the 151 in the Croatian parliament. Despite corruption scandals that led to a ministerial reshuffle in July 2022, HDZ is expected to remain the favourite in the legislative elections that are scheduled to be held before September 2024. HDZ led the polls late in 2023, with approximately 25% of the votes, well ahead of the Social Democratic Party of Croatia (SDP), the opposition party, which totalled around 15%. The political landscape, however, will continue to be marked by tensions between the Prime Minister and President Zoran Milanovic, a member of the SDP, with the upcoming presidential elections in December 2024 fanning animosity between the two. Simultaneously, Croatia will continue to face an increased influx of illegal migrants seeking to join the EU due to its recent accession to the Schengen Area. Furthermore, Croatia will maintain ties with France, from which it bought six used Rafale aircraft. The first was delivered to the Croatian army in October 2023, and the remainder is scheduled to be delivered in 2024. Croatia will also strengthen its ties with Bosnia, with which it has strong economic relations for trade volumes and investments. The construction of a gas pipeline between the two countries is planned for 2024. However, this might be delayed if the Croatian Democratic Union of Bosnia and Herzegovina (HDZ BiH) insists that the operator of the pipeline in Bosnia be a company based in Mostar, a predominantly Croatian region, rather than BH-Gas, a company based in Sarajevo initially chosen for the project.

Last updated: March 2024