OECD Economic Outlook, Volume 2023 Issue 1

Croatia

Output growth is expected to moderate to 2.1% in 2023 and 2.5% in 2024. Rising wages and jobs growth will support households’ real spending. Croatia’s integration in the euro and Schengen areas plus higher disbursement of European funds are expected to bolster investment and exports. Inflation will gradually abate from current high rates following the retreat in energy and other international prices.

The government plans to shift the budget balance from a small surplus in 2022 to a modest deficit in 2023 and a larger deficit in 2024. It has extended substantial energy price subsidies, alongside more modest support for incomes and expanded energy efficiency investments. Curtailing spending on untargeted energy price subsidies sooner, while further addressing Croatia’s structural challenges, such as by boosting adult education, family support and investments in energy efficiency, would help make the recovery more sustainable and inclusive.

The surge in prices slowed Croatia’s recovery

GDP growth slowed following the surge in energy prices and uncertainty following Russia’s war of aggression in Ukraine, although the mild and late winter supported construction activity and reduced the drag from high energy prices, moderating the slowdown. Harmonised consumer price inflation peaked at 13.0% in the year to November 2022, before gradually abating to 8.9% in the year to April 2023 as energy prices fell by 6.6% from their 2022 peak. However, inflationary pressures have broadened. Price growth has lowered households’ purchasing power, especially those with low incomes. Households are reducing their savings while maintaining consumption. Employment continued to expand, reducing the unemployment rate to 6.5% in April 2023. This, and the government’s 12% minimum wage rise for 2023, are contributing to rising wages. Exports of both goods and services grew robustly in late 2022 and early 2023. Early indicators point to a strong start to the 2023 tourism season.

Croatia: Inflation and fiscal indicators

1. Weighted median harmonised inflation has been computed using harmonised consumer prices of 222 products.

2. Maastricht definition.

Source: OECD Economic Outlook 113 database; Eurostat; and OECD calculations.

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Croatia: Demand, output and prices

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Lower international energy prices have benefited Croatia. Croatia’s gas import and storage capacity and its large share of electricity generated from renewable sources have protected it from supply disruptions. The integration into the euro, which has expanded access to finance and banks’ liquidity, has reduced the pass-through of higher global interest rates, although rates have risen in some markets and conditions have tightened for some loans, slowing lending growth. Croatia is participating in supporting Ukraine and has provided over 21 000 temporary protection visas to refugees.

Fiscal and monetary conditions will remain supportive

Growth in activity and prices in 2022 buoyed government revenues while public spending fell short of plans, notably for public investment, leading to a small budget surplus and lowering the public debt ratio. The government plans a modest deficit in 2023, and a larger deficit in 2024, implying a fiscal stimulus. The government’s fourth energy response package, announced in March, accounts for much of the return to deficit. The EUR 1.7 billion package (2.3% of 2023 GDP) extends price subsidies, including largely non-targeted energy bill subsidies (EUR 1.2 billion), and support for renewable energies, energy efficiency investments and for vulnerable households. Most of the measures are scheduled to apply until October 2023, April 2024 or are one-off transfers. The transmission of tighter euro area monetary policy to Croatia is expected to gradually strengthen as Croatia integrates into the euro area.

Rising incomes, moderating inflation and higher investment will lift growth

As real incomes recover through increasing wages and continued employment growth, household consumption is projected to strengthen, lifting overall GDP growth. Reduced energy prices and global supply disruptions should allow inflation to further abate, although headline inflation will temporarily lift with the expiry of energy support measures. Investment, supported by higher public spending and foreign investment, and exports, supported by gradually improving demand in trading partners, are also projected to add to demand. Improving competitiveness, maintaining fiscal credibility by achieving budgeted spending and fiscal balances, and the full implementation of Croatia’s Recovery and Resilience Plan are central to raising investment, productivity and living standards. A new surge in energy prices would likely weaken private consumption, public finances, and international competitiveness. A large rise in low‑quality domestic lending or a deterioration in banks’ health internationally would imperil the supply of credit for business investment or new housing and commercial building supply.

Investing in more accessible education can boost opportunities

As household consumption recovers, and integration into the euro and Schengen areas bolsters demand, more counter-cyclical fiscal policy would support competitiveness and alleviate capacity constraints. Key needs include ensuring any unplanned revenues build fiscal buffers, shifting from subsidising energy costs to targeted help for households, and investing in reducing energy needs – such as renovating buildings or upgrading transport equipment – to reduce the country’s energy exposure and improve air quality. Boosting the supply of quality adult and vocational education programmes and improving their accessibility, for example by expanding vouchers and making programmes’ hours and teaching modes more flexible, can raise skills and allow carers to combine work, study and family. Adding places for younger children in education and care, pursuing the shift to standardised school hours and after-school support, and encouraging workplaces to adopt more flexible arrangements can improve human capital and help women especially realise more productive careers.