The global economic activity this year has proven to be relatively resilient to geopolitical and trade challenges. Expectations about global economic growth have slightly improved from the September projections due to more favourable developments in the first half of the year and further decline in trade policy uncertainty. Nevertheless, global growth and trade are envisaged to weaken next year with the unfavourable effects of increased tariffs materialising to their full extent. The expected euro area economic growth has been revised slightly upward owing to stronger outturns, stronger foreign demand, lower uncertainty and lower expected energy prices. Domestic demand is to remain the main growth generator given the resilience of the labour market and the expected continuation of real income growth, the delayed effects of the cut in key interest rates in the period until June 2025 and the announced growth of defence and infrastructure investments. In line with September expectations, the euro area inflation in the following two years might come in at slightly below target, reflecting a low energy price inflation.
Croatia’s economic activity growth could remain relatively strong in the following years but could continue to gradually decelerate. Real GDP growth slowed down visibly in the third quarter after surging in the previous three months. Such developments are largely a consequence of the worsening of the price competitiveness of Croatian tourism, which was reflected in the decline in the services exports and a slight reduction in private consumption. On the other hand, growth of investments and exports of goods increased. According to the latest available high-frequency data for the fourth quarter, economic activity could regain strength at the end of the year, pushing real GDP growth up to 3.0% on an annual level in 2025, after the 3.8% registered in 2024. This is slightly below previous expectations and a reflection of poorer results in the third quarter. In the following two years the economic activity expansion in Croatia could continue to slow down gradually, with real GDP growth reaching 2.6% in 2027. Domestic demand could remain the main driver of growth, with personal consumption growth temporarily increasing in 2026, owing to base effects associated with the retail chains boycott early in 2025 and the subdued demand during the summer months, despite the slowdown in the growth of real income and less stimulative fiscal policy. In addition, the contribution of personal and government consumption and investments is expected to decline over the projection horizon from the high levels attained over the past two years. On the other hand, given that the negative effects of geopolitical tensions and the increase in US tariffs on EU products have not had a significant impact on global and euro area economic developments, foreign demand could strengthen, which should benefit Croatian goods exports. Although services exports are expected to gain strength, this growth could remain relatively subdued on account of already reached high price levels and weakened price competitiveness of the Croatian tourism. Risks associated with Croatia’s central real growth projection are assessed to be balanced, with risks for the global economic activity growth and decline in prices of food commodity prices and energy being persistently elevated due to heightened geopolitical tensions and the prospect of their further escalation. In addition, in case of weakening of protectionist pressures the growth of foreign demand could outstrip expectations and favourably affect goods exports. On the other hand, however, the escalation of trade tensions and potential introduction of new types of protectionist measures would have a dampening impact on economic developments and growth in Croatia.
After the temporary acceleration of total inflation at the end of last year and at the beginning of 2025 resulting from the growth of energy prices for households and food commodity prices, current upward price pressures were mostly weaker than in 2024, with such trends expected to continue in the following two years. The average annual inflation rate measured by the harmonised index of consumer prices (HICP) could increase from 4.0% in 2024 to 4.4% in 2025 and inflation measured by the national consumer price index (CPI) from 3.0% to 3.7%. The increase in the average annual inflation rate largely reflects the acceleration in inflation at the end of last year and at the beginning of 2025, primarily under the influence of the growth of prices for energy for households and food commodity prices. In contrast to the overall inflation, core inflation (which excludes energy and food prices) could decrease from 4.8% in 2024 to 4.1% in 2025. Despite the continued slowdown, core inflation remains elevated, in particular in the segment of services price inflation. The alleviation of inflationary pressures is expected in 2026 and 2027 due to a slowdown in the growth of economic activity and unit labour costs (associated with decelerating wage growth and accelerating productivity growth), subdued growth in foreign demand for tourism services, a decrease in the global prices of energy products and food commodity prices and a slowdown in inflation of the main trading partners. In addition, CNB’s new macroprudential measures, introduced in July 2025, to restrict household lending criteria to preserve financial stability, will also contribute to the alleviation of domestic inflationary pressures. Considering the above, total inflation in 2026 could slow down to 3.4% by HICP and 3.1% by CPI. Only the energy price inflation could increase in annual terms, partly reflecting further growth in administrative energy prices for households. The projected deceleration of overall inflation to 2.4% in 2027 by HICP and 2.3% by CPI reflects the slower annual price growth of all main components (energy, food and core inflation) compared with the previous year. Risks to the realisation of the inflation projection have remained balanced. However, continued strong growth of labour costs could have stronger than expected impact on price growth and inflation pressures could mount in case of escalation of geopolitical tensions and higher frequency of extreme weather events. On the other hand, stronger slowdown in economic activity, stronger effects of the euro exchange rate appreciation and the potential rerouting of Chinese goods exports from the US to the European market could result in lower than expected inflation.
With regard to the labour market, growth of employment and wages is expected to slow down after their strong growth in 2024. According to administrative data, the average number of employed persons was 2.6% higher in the first ten months of 2025 than in the same period of the preceding year, after registering 3.3% growth in 2024. The annual rate of growth in public sector employment accelerated to 4.2%, from 2.7% in 2024, and slowed down in the rest of the economy from 3.4% to 2.1%. The growth in the number of persons employed in the public sector was concentrated in the first half of the year, after which the number of the employed stagnated, while the rest of the economy registered a boost in the dynamic in the second half of the year. The unemployment rate continued to decline in October due to continued employment growth, reaching 4.3%. A gradual deceleration in employment growth is expected over the remainder of the projection horizon, to 1.8% in 2026 and 1.4% in 2027. The unemployment rate could also decline further. However, considering the attained historical low, the increase in employment will continue to largely depend on the strengthening of the participation and import of foreign workers. When it comes to wages, their annual growth rate slowed down considerably from the second quarter of this year once the base effects of a sharp rise in public sector wages following last year’s reform in the remuneration policy waned in April, but has fluctuated around a two-digit level. The average nominal gross wage was up 9.9% and 10.1% in the third quarter and October, respectively, from the same period of the year before, while the real gross wage was up 5.6% and 6.2%, respectively. Amid the continued pronounced demand for labour, paired with low unemployment, the growth of wages and unit labour costs is expected to be relatively strong although weaker in intensity, with the expected nominal growth in gross wages towards the end of the projection horizon totalling some 4.5%.
The deficit in the balance of payments current and capital account could stagnate in the next two years after having widened in 2025, partly also due to the weakening of the competitive position of Croatian tourism. The expected deficit compared to the September projection also increased due to the revision of the balance of payment data for the first two quarters of 2025 and the entire 2024, which reflected information on realised trade in goods from new data sources. The balance of payments current account deficit in 2024 thus increased from 1.2% to 2.2% of GDP, which resulted in the higher projected deficit over the entire projection horizon. Further, the cost competitiveness indicator which takes into account the relative changes of unit labour costs continued to deteriorate relatively strongly in 2025, reflecting continued rise in labour costs, and the same developments continued in terms of the price competitiveness indicator deflated by relative producer prices. The deterioration in the price and cost competitiveness of the domestic economy also affected foreign trade, so at the end of the first half of 2025, the cumulative deficit of the current and capital account balance in the second half of 2024 and the first half of 2025 was increased to –1.9% of GDP, from –0.8% of GDP it totalled in 2024. The current account balance deteriorated the most in the segment of services exports, predominantly in tourism-related services, while the goods trade balance could improve slightly in 2025. The current and capital account deficit is expected to stagnate over the projection horizon, with continued weakening of the services balance surplus, while the deficit in the goods sub-account could decrease further. The positive capital account balance could increase additionally in 2025, amid more intensive utilisation of funds from the Recovery and Resilience Facility, given that the major portion of these funds should be utilised until the end of next year. After that, the capital account balance could deteriorate at the end of the projection horizon, since the utilisation of funds from the current financial envelope could increase only gradually and will probably not suffice to make up for the fall in funds from the Recovery and Resilience Facility
The European Central Bank (ECB) has published a projection for the euro area