Overview of the CNB’s autumn macroeconomic projections for Croatia – September 2024

Published: 17/9/2024

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 and ECB 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.

Recent global economic developments have been relatively favourable. Thus, expectations regarding global growth for the forthcoming period have been revised up, with a slightly weaker projected growth in Croatia’s trading partners. Global economic activity surpassed expectations in the second quarter, especially in the USA, while China’s economy continued to face challenges. The euro area economy continued to grow approximately in line with expectations, even though some of Croatia's main trading partners, such as Germany, continue to record negative trends. Thus, foreign demand for Croatian products and services has been revised down from the previous projection and its strengthening is not expected before next year. Global price pressures continued to ease more than expected. Lower demand contributed to the fall in crude oil prices during the summer months, so that the expected prices until the end of the projection horizon have been revised slightly down. The growth in the prices of agricultural and industrial raw materials also moderated further. In contrast, electricity and gas prices in the European market rose due to increased uncertainty over supply. Assumptions about global financing conditions have improved, largely due to the earlier and faster expected easing of the Fed’s monetary policy stance.

The Croatian economy continued to expand relatively strongly, largely mirroring the strengthening of domestic demand. Real GDP growth over the whole projection horizon is now slightly more robust than projected by the CNB in June this year. In 2024, real GDP growth is expected to strengthen, from 3.1% in 2023 to 3.6%, as a result of the ongoing sharp increase in private consumption, underpinned by the increase in the real disposable income of households and a considerable rise in investment activity. In view of the exceptionally strong growth in the first half of 2024, investments might record a double-digit growth this year and considerably exceed earlier projections, as a reflection of favourable developments in both the private and the public sector. On the other hand, net exports are expected to make a much smaller contribution to GDP growth, primarily due to a pronounced growth of imports and a decrease in exports of services in the first half of the year. These developments are partly caused by the negative base effects at the beginning of the year (exports of processing services recorded a sharp one-off increase in early 2023) and partly stem from subdued real exports of tourist services associated with the strong rise in prices in the services sector, even though nominal tourism revenues might hit all-time highs this year. Given that domestic demand growth perceptibly exceeded previous expectations, especially in terms of investments, GDP growth in 2024 has been revised up by 0.4 percentage points relative to the projection from June this year. Over the remainder of the projection horizon, real GDP growth is projected to continue its upward path at an average rate of 3.0%, a slightly faster pace than previously projected. Partly spurred by the easing of monetary policy restrictiveness, foreign demand might continue to recover, along with the Croatian exports of goods and services. Investments might also continue to grow, partly also due to the continued inflow of EU funds, albeit at a slower pace than in 2024. Against this background, favourable developments in the labour market are expected to continue and private consumption is expected to grow robustly. The risks associated with Croatia's central real growth projection seem to be slightly negative and are largely linked with external factors, that is, the escalation of geopolitical tensions and the possibility of protracted subdued growth in some of Croatia's major trading partners.

Labour market has remained robust. In 2024, growth of employment is expected to further intensify and unemployment is expected to decrease, while nominal gross wages might rise considerably more than previously expected. In light of the good performance and the strong growth of economic activity, employment might be 3.0% higher in 2024 as a whole than in the year before. Employment is expected to increase further in 2025 and 2026, albeit at a slower pace. The registered unemployment rate might come down to around 5.2% of the labour force in the current year and remain below 5% over the rest of the projection horizon. As regards wages, after wage growth in the public sector exceeded expectations based on the information available at the moment the June projection was prepared, it is now expected that the average gross wage will see an annual growth of 14.9% in 2024 in nominal terms, close to levels recorded last year, while real wage growth might pick up to 10.8%. The annual growth of gross wages is expected to considerably moderate in the rest of the projection horizon.

Inflation in Croatia is still expected to ease gradually. However, the estimated and projected inflation rates have been revised up over the projection horizon compared with the June projection. The average annual consumer price inflation rate (HICP) could be more than halved in 2024, from 8.4% in 2023 to 3.9%, and might further decline to 3.4% in 2025 and 2.3% in 2026. The slowdown in inflation, which has been ongoing since end-2022, mirrors lower prices of energy, food and other raw materials in the world market and the normalisation of global supply chains, which spilled over to import and producer prices in the domestic market, as well as the effects of the restrictive monetary policy. Current inflationary pressures have been persistently low in all segments of the consumer basket since the end of last year, with the exception of services price inflation. The slowdown in inflation was also due to favourable base effects caused by higher monthly inflation rates, which were particularly pronounced until August last year. Due to negative base effects and the announced price increases for gas, electricity and heat, overall inflation could prick up temporarily in the remaining part of 2024 and in early 2025 and then continue its gradual decline. Even though services inflation has remained elevated, the pronounced current pressures in the services sector, which mirror a strong wage growth and demand for catering and accommodation services, are expected to abate after the end of the peak tourist season. Compared with the June projection, the projection for overall inflation has been revised up, taking into account slightly higher recent inflation trends (especially of services price inflation), stronger than expected wage growth and the announced increase in the administered energy prices. It is estimated that the risks surrounding the projected inflation path are balanced. Risks that could contribute to a higher than expected inflation include geopolitical tensions and unfavourable weather conditions. In addition, stronger than expected wage growth might translate into a faster price growth, especially of services. Inflation could also be higher if a certain decline in corporate profits does not continue to offset, to some extent, the impact of the strong wage growth. On the other hand, risks that could contribute to inflation being lower than projected include a potentially weaker economic growth, stronger impacts of the restrictive monetary policy and a more intensive than expected spillover of the fall in the prices of energy and other raw materials in the global market on consumer prices.

The surplus in the current and capital account of the balance of payments is expected to decline to 2.2% of GDP in the current year, after having reached 3.7% of GDP in 2023. Viewed by individual sub-accounts, further widening of the foreign trade deficit could contribute most to such deterioration. This is due to diverging domestic and foreign demand trends, that is, a relatively strong recovery in imports of goods amid a relatively robust domestic demand, which was not accompanied by an equally strong recovery in exports. After the use of EU funds peaked in 2023, the last year in which withdrawals from the previous multi-year financial perspective were possible, when withdrawals are usually generous, the inflows of EU funds are expected to slightly decline in 2024. A somewhat weaker growth in revenues is expected with regard to trade in services, including tourism. In addition, expenditures are expected to accelerate their growth; consequently, net exports of services might be lower than in the year before. The income account balance could improve slightly in 2024, given that net interest income of the central bank has continued to grow strongly. The current and capital account balance is expected to pick up to 2.6% and 2.3% of GDP in 2025 and 2026 respectively, largely due to higher inflows of EU funds and a recovery of foreign demand. Risks to the preservation of the positive current and capital account balance remain pronounced, with the most important risks being associated with the possibility of rising energy prices, geopolitical risks, global trade policy, as well as the competitiveness of domestic exporters. Tourism also faces challenges such as climate change, while the use of EU funds could be limited by the 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)

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