Real GDP growth is expected to decelerate gradually in the following two years amid extremely heightened uncertainties triggered by trade tensions, but it will remain relatively strong. Real GDP grew by 3.9% in 2024 and is expected to decelerate to 3.3% in 2025 and further to 2.9% in 2026. The negative effects of geopolitical tensions and increased US tariffs on EU products should not have a significant impact on the Croatian economy if the tariffs remain at their current level, which is included in the projection as a technical assumption. Croatia’s relatively low exposure to the US market contains the negative impacts of the tariffs on exports, so that foreign demand is expected to increase slightly more than in the previous year despite the introduction of tariffs on exports to the US, which should support the further strengthening of goods and services exports. In addition, a robust labour market and the inflow of EU funds will continue to support a relatively strong growth of domestic demand. However, the contribution of domestic demand to growth could weaken gradually, given the expected slowdown in the growth of real disposable household income and the decelerated growth of investment activity, which on average grew almost at double-digit rates in the previous three years. Domestic demand could also decelerate due heightened uncertainty, which could result in the growth of household savings and the postponement of business investments. Risks to real GDP growth are assessed as slightly negative. Any deeper escalation of geopolitical tensions would further weaken the global economy. In addition, an increase in US tariffs on EU goods imports from their current level and EU’s potential trade retaliation would have a negative impact on Croatian exports and economic activity. By contrast, the easing of geopolitical tensions and trade agreements on tariff reductions would favourably impact foreign demand, goods exports and real growth. A potential increase in military expenditure in Croatia and other EU member states poses an additional positive risk to GDP growth.
Employment growth and the growth of nominal and real wages could also decelerate gradually towards the end of the projection horizon, but it will remain relatively strong. After growing by 3.3% in 2024, employment could increase by 2.8% in 2025, driven by the still strong domestic economic activity. Unemployment, already at historical lows, is expected to continue to drop, while the LFS unemployment rate could fall below 5%. The average nominal gross wage, having risen by 15% in the previous year (the real wage by 11.4%), could decelerate to 9.5% in 2025 (the real wage to 6.5%). Against the backdrop of low unemployment and high labour demand, private sector wage growth could remain robust and only slightly lower than in 2025, supported also by an increase in minimum wages. Public sector wages, on the other hand, are anticipated to grow at considerably lower rates, in line with the increase agreed between the Croatian government and trade unions. The growth of employment and wages is expected to continue decelerating in the following year.
Amid the deceleration of domestic demand growth and the weakening of cost pressures, coupled with constantly low imported inflationary pressures, inflation is expected to continue a gradual slowdown. The average annual inflation rate measured by the harmonised indicator (HICP) could decelerate to 3.6% in 2025 (from 4.0% in 2024) and decrease further to 2.6% in 2026. Inflation measured by the national indicator (CPI) could amount to 2.8% in 2025 (compared with 3.0% in 2024) and decelerate further to 2.2% in 2026. The decrease in inflation in 2025, the third consecutive year, could primarily result from core inflation decelerating to 3.6% (from 4.8% in 2024, measured by the HICP) as a result of a slowdown in the growth of wages and personal consumption, a subdued growth of foreign demand for tourism-related services and the weakening of cost pressures due to the strengthening of the euro and the spillover of a recent decrease in energy prices to other inflation components. In addition, CNB’s new macroprudential measures could lead to the alleviation of inflationary pressures. The slowdown in overall inflation could also to some extent reflect a decrease in food inflation to 4.0% (from 4.4% in 2024). In contrast, energy inflation could accelerate to 2.9% in 2025 (from –0.3% in 2024), mainly as a result of an increase in the administered prices of gas, electricity and heat energy at the end of 2024 and a smaller increase in these prices at the beginning of 2025. The inflation of prices of all major inflation components could decelerate further in 2026 amid low current pressures. The projection of HICP inflation for 2025 has been revised slightly downwards by 0.1 percentage point compared with March projections, while for 2026 it has remained unchanged. Energy inflation could be lower than expected in 2025 due to a sharp decrease in refined petroleum products’ prices in March and April. Nevertheless, this was mostly offset by the higher projected core inflation resulting from higher than expected services inflation. Risks to inflation are assessed as balanced, but still pronounced. Risks that could lead to higher inflation include a stronger than expected wage growth, geopolitical tensions and possible disruptions in the supply of energy and other raw materials, higher import prices due to higher tariffs and the fragmentation of global supply chains, adverse weather conditions as well as higher defence spending than currently expected. On the other hand, inflation could be lower than expected in case of a stronger than expected spillover of decreases in energy prices to its other components, further appreciation of the euro, weaker economic growth due to intensifying trade tensions and the redirection of Chinese goods exports.
Due to the still relatively strong domestic demand, accompanied by subdued growth in goods and services exports, the current and capital account balance could move to the negative territory, after a noticeable decrease in 2024. Specifically, after the surplus narrowed from 3.3% of GDP in 2023 to 0.2% of GDP in 2024, the year 2026 is expected to see a negative balance of 0.6% of GDP. As in the year before, the current and capital account balance might be under the dominant influence of a deterioration in the trade in goods and services over the projection horizon. The continued relatively strong growth of domestic demand will keep on supporting the growth of goods imports, while the limited growth of tourism revenues, coupled with the steady strong growth of tourist consumption of residents abroad, could contribute to the further deterioration of the trade in services balance. The lower price competitiveness of the domestic tourist sector and rising uncertainty in outbound markets will continue to negatively influence tourist services exports. In addition, geopolitical tensions could cause disruptions to global trade and hamper the operation of the export sector. Although the US is not among Croatia’s major trading partners, the negative consequences of a potential further escalation of trade tensions would spill over to the domestic economy indirectly, by weakening foreign demand and possible disruptions in supply chains. In addition to by foreign trade in goods and services, the current and capital account balance could be negatively affected in the projection period by a further decline in net income in the income account, deriving primarily from the growth of income of foreign workers employed in Croatia, that is, the outflow of their foreign remittances.
The European Central Bank (ECB) has published a projection for the euro area, available at link.
Table 1. Macroeconomic projections for Croatia
(year-on-year change, unless otherwise indicated)