Overview of the CNB’s spring macroeconomic projections for Croatia – March 2024

Published: 8/3/2024

Macroeconomic projections aim to predict and understand the future state of the economy on a broad scale. They include projections of economic growth, inflation, wages, unemployment and trade. Eurosystem staff produce macroeconomic projections for the euro area and the wider global economy. Macroeconomic projections contribute to the ECB Governing Council’s assessment of economic developments and risks to price stability (ECB). Since joining the euro area, the Croatian National Bank (CNB) produces two basic Eurosystem macroeconomic projections, along with the ECB and other national central banks. These projections are published in June and December. In addition, twice a year, in March and September, the ECB independently updates these projections for the euro area, while the CNB independently updates the projections for Croatia.

Despite global economic slowdown at the turn of the year, the expectations for 2024 have slightly improved from the December 2023 projection, with an expectation of somewhat weaker price pressures. The more positive expectations regarding global economic growth largely reflect better performance of the US economy, backed by a robust labour market and a recovery of investments. Furthermore, the expectations for emerging market economies have also been revised slightly up, despite blinding uncertainty. International trade has been moving at a pace different from the global economic activity and its contribution to global growth has remained muted. Global price pressures abated more than expected late last year. Consequently, the projected inflation trajectory has also been revised downwards in most countries. Prices of energy, especially of electricity and gas in the European market, have been revised the most. The drop in these prices stems from receding uncertainty about the supply of these energy products, as well as weak demand during a very mild winter. On the other hand, prices of food and industrial raw materials are expected to edge up. Risks to global inflation and economic growth remain elevated and are largely associated with the potential escalation of the conflict in the Middle East and the war in Ukraine, as well as with Red Sea disruptions, which might add to uncertainty and cause a new hike in the prices of energy and other raw materials.

Against this background, real growth in Croatia might be faster in 2024 than the year before, and pick up more than previously anticipated due to somewhat better results at the turn of the year. Croatia's real GDP growth is projected to stand at 3.2% in 2024 and to edge down to an average of 2.7% towards the end of the projection horizon. The expected trends in 2024 are still largely influenced by a robust growth in domestic demand and especially by the rise in personal consumption, supported by favourable labour market trends and the growth in real income. Investment activity is expected to resume its upward path, albeit at a slower pace than in 2023, given that public investments might start moderating due to the completion of some programmes and projects financed from EU funds. Growth of goods exports might also pick up, while the growth in services exports might decelerate after a strong recovery from the pandemic. However, given that strong domestic demand is expected to accelerate the growth of imports, the contribution of net foreign demand might again become slightly negative. Over the remainder of the projection horizon, the largest boost to economic growth could keep coming from domestic demand, while the contribution of net foreign demand might be neutral. Risks to Croatia's real GDP growth have remained slightly negative. Economic and price developments in the international environment, especially in Croatia's major trading partners, remain highly uncertain, while the unfavourable effect of tight financing conditions might be stronger than currently expected. On the other hand, should geopolitical tensions relax, the developments in foreign demand might outstrip expectations and favourably impact Croatia's exports, while the strong growth of the real disposable income might spur even greater growth of personal consumption.

A relatively strong employment growth and a decline in unemployment is expected in the domestic labour market, with a further rise in nominal wages, though at a slower pace, followed by the gradual recovery in real wages. In the light of the continued upward phase of the economic cycle, employment is expected to grow further (by 1.8% in 2024), albeit at a slower pace towards the second part of the projection horizon. Unemployment is expected to continue declining, and the ILO unemployment rate might be 6% in 2024. Nominal and real gross wages in Croatia are expected to continue growing in 2024, albeit at a somewhat more subdued pace than last year, with a pronounced wage growth in the public sector, even though this will depend on private sector workers’ bargaining power. Wage growth is expected to continue decelerating over the remainder of the projection horizon.

With the unwinding of past shocks, inflation is expected to continue decelerating in the coming months amid subdued current inflationary pressures. The moderation in producer price inflation, as well as favourable base effects envisaged throughout most of 2024 should keep inflationary pressures at the current low levels. Estimates show that the average annual consumer price inflation rate in Croatia could be more than halved, from 8.4% in 2023 to 3.5% in 2024, driven by the expected decline in all the main inflation components, in particular core inflation. After stagnating in 2023, energy prices might edge down marginally in the current year, provided that administered prices of gas and electricity for households remain unchanged. The backdrop of lower energy and food commodity prices paired with normalised supply chains might contribute to a marked slowdown in inflation of food and industrial products. Services inflation is envisaged to be halved in 2024, with the receding importance of the factors that earlier contributed to the marked growth in the prices of catering and accommodation services, most of all buoyant demand and price convergence to the euro area average. A further moderation in headline inflation in 2025 and 2026, to 2.4% and 2.0% respectively, reflects the anticipated further decrease in core and food inflation. Estimates suggest that risks related to inflation projections for the current year are balanced. On the one hand, geopolitical tensions might cause a spike in the prices of energy and other raw materials, while unfavourable weather conditions might trigger an unforeseen increase in food prices. Inflation might also turn out to be higher if wage growth exceeds expectations or if profits fail to continue absorbing a part of upward pressures on prices stemming from the strong wage growth. On the other hand, weaker economic growth, stronger impact of monetary policy tightening and a sharp drop in global commodity prices are risks that might contribute to lower than projected inflation.

After the very high levels seen in 2023, the surplus in the current and capital account of Croatia’s balance of payments is projected to be somewhat lower in 2024 and the years to come. The particularly high surplus in the current and capital account of 4% of GDP in 2023 was a result of falling energy prices and growing tourism revenues, paired with record-high inflows of EU funds ahead of the expiry of the period for the use of the funds allocated under the 2014-2020 financial envelope. As these favourable effects fade, the surplus in the current and capital account is expected to decrease to 3.8% of GDP in 2024 and further to 3.1% of GDP by the end of the projection horizon. This is mostly attributable to smaller envisaged inflows from the EU budget relative to the 2023 peak and the growth in the foreign trade deficit due to rising domestic demand. The overall balance might also be adversely affected by the ongoing increase in income account expenditures, mostly due to growing earnings of foreign workers in Croatia, which will increasingly affect the balance of payments. The opposite effect might be produced by the downturn in bank profits following exceptional results in 2023. Tourism revenues are set to grow steadily throughout the projection horizon, albeit at a slower pace given the supply-side restrictions. The persistently elevated risks to economic relations with foreign countries are mostly associated with the prices of energy and other raw materials, followed by geopolitical tensions and trade fragmentation, which may impede foreign trade and weaken investor sentiment. There are also risks associated with the use of EU funds, which may either exceed current projections or fall short of expectations due to the limited absorption capacity of domestic beneficiaries.

The European Central Bank (ECB) published its spring projection for the euro area, available here.

Table with macroeconomic projections for Croatia

(year-on-year change, unless otherwise indicated)

Download table (xls)