Yesterday, the World Bank revised Croatia’s GDP forecast for 2023 to 2.7%, an increase of 0.8 p.p. compared to its last forecast in June of 1.9%.

According to the latest report by the World Bank, Croatia is projected to grow at 2.7% YoY, an increase from 1.9% in the last forecast made in June. Furthermore, as mentioned by the Bank: “Croatia’s economy remained on an expansion path in the first half of 2023 supported by robust private consumption and buoyant demand for travel services. Over the forecast horizon, economic growth is expected to stay close to 3 percent as inflation moderates, and the external outlook improves. Steady growth and a declining need for fiscal support are expected to keep the fiscal deficit contained and public debt on a declining path. Poverty in 2023 is expected to decline to 1.3 percent.”

Delving further into the report, Croatia had a GDP per capita (in PPP terms) that reached 73% of the average EU27 level in 2022. This was achieved despite significant headwinds such as high inflation, monetary tightening, and faltering external demand for goods. Due to tourism, Croatia managed to recover the fastest among all the EU member countries. However, continued demand for services in tourism is unlikely to be sustained in the medium to long term, and as such it will be crucial to address key structural issues that will support productivity and long-term growth acceleration. Some of these issues include low levels of R&D investments, low levels of innovation and technology adoption, weaknesses in managerial and organizational practices, administrative capacity, and judicial quality and efficiency. Furthermore, due to unfavorable demographic trends and a tight labour market, improvements in education and labour market policies will be necessary. Lastly, the War in Ukraine, the developments in energy and food commodity prices, as well as the impact of high-interest rates continue to pose risks to the outlook.

In the outlook itself, the World Bank notes that economic activity growth is expected to moderate in H2 2023, as demand for tourism services slows down and goods exports remain suppressed. Nonetheless, due to the relatively strong performance in H1 2023, real GDP growth is set at 2.7% in 2023. Personal consumption is projected to remain robust, as recovery in real incomes continues due to falling inflation and strong labour demand. Furthermore, EU funds are expected to continue supporting investment activity, especially government investments, while private sector investment growth might slow in the near term before strengthening towards the end of the forecast period in 2025, as monetary policy normalizes. Export of goods, which was quite weak in 2023, is expected to pick up in 2024 and 2025 as external demand strengthens. On the other hand, the growth of exports of services might become more moderate after strong results in 2021 – 2023.

Inflation is expected to remain elevated over the near term but could decline towards the ECB target of 2% by the end of 2025, following monetary measures implemented since the end of 2021, unwinding of global supply bottlenecks, and easing of commodity price growth. The fiscal deficit is set to remain contained, as growth continues and the need for fiscal support declines. This, in turn, will allow for further reduction in public debt which is expected to fall below 60% of GDP by YE 2025.

The full report can be accessed here.

World Bank Forecast for Croatia

Source: World Bank, InterCapital Research