OECD Economic Outlook, Volume 2024 Issue 1

Croatia

GDP will grow by 3.3% in 2024 as higher wages, increased employment and ongoing disinflation boost households’ real incomes and raise domestic demand. In 2025, growth will remain robust, at 2.8%, supported by spending of EU funds and the ongoing benefits of Croatia’s integration in the euro and Schengen areas.

Tight euro area monetary conditions are slowing private investment. The budget deficit will widen in 2024, contributing to demand pressures. In 2025, the deficit should decline modestly, through slower spending growth and higher revenues. Public debt is expected to fall below 60% of GDP by late 2025. Containing further public wage growth and ending poorly-targeted price caps, energy and home loan subsidies as planned would help growth to remain sustainable, improve the economy’s efficiency and build fiscal buffers for future shocks.

Private consumption and public investment have maintained robust growth

Output growth has been buoyed by robust consumer spending and increased public investment fuelled by EU funds. Construction activity in late 2023 was 10% higher than a year earlier. These trends offset slower growth of private investment and government consumption. Household disposable incomes have risen strongly over 2023, owing to strong wage growth and rising employment. Both private and public sector wages have grown strongly reflecting the tight labour market, public sector pay reforms and a 20% increase in the minimum wage at the start of 2024. These trends continued into the first months of 2024, lifting consumer and business sentiment indicators to their highest levels since the COVID-19 crisis.

Croatia; Economic growth and fiscal indicators

1. Includes the statistical discrepancies.

2. Maastricht definition.

Source: OECD Economic Outlook 115 database.

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Croatia: Demand, output and prices

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Softer external demand lowered exports of goods and services last year, but stabilised around the turn of 2024. Tourist stays during the summer peak of the 2023 season declined from the records reached a year earlier but were higher than usual later in the year and in February 2024. Weaker goods exports hit domestic manufacturing output. Improved regional energy supply, lower energy demand with the mild winter, and good food harvests are limiting price growth of these goods. Consumer energy prices in March 2024 were 4.3% lower than their recent peaks, while food prices were little changed compared with mid‑2023. Annual consumer price inflation moderated to 4.9% in March 2024, compared with 10.5% a year earlier. Core inflation remains higher, at 5.4% in the year to March 2024, as rising wages and tourism demand continued to buoy services prices.

Fiscal policy will be expansionary in the near term

The budget deficit is expected to widen substantially to near 2¼ per cent of GDP in 2024. Expenditure will rise due to increases in public-sector pay and pensions, and higher public and defence investment, while cuts in household income tax and social contribution rates will reduce revenue growth. Croatia has gained access to NextGenerationEU loans to further raise public investment. In 2025, the budget deficit is expected to decline to about 1¾ per cent of GDP as spending growth moderates and the growing economy supports revenues. Despite the wider deficits, public debt is expected to fall from 64% of GDP in 2023 to below 60% of GDP by the end of 2025, consistent with the European Stability and Growth Pact. Credit conditions have tightened, reflecting higher interest rates. This has slowed credit growth, especially for businesses, contributing to slower private investment growth. Lending to households has been more robust, with both ‘general-purpose’ cash loans and housing lending rising. Higher housing lending reflects rising house prices amid tight supply, the development of the home loan market in Croatia, and the effects of a home loan subsidy programme in 2023.

Growth is expected to remain robust

In 2024, annual growth will be bolstered by carry-over effects from the robust performance in the second half of 2023. Strong wage growth and the tight labour market, combined with moderate price growth, will further raise households’ real disposable income, supporting private consumption. Government investment will be fuelled by EU funds. Improving external conditions will raise export volumes. However, robust domestic demand will lead import growth to outpace export growth. The moderation in inflation is likely to slow and inflation will remain above the euro area average. Energy and food prices are expected to stabilise while services inflation will remain firm, buoyed by recent strong wage growth and tourism demand. Strong rates of growth in private and public wages, if not matched by higher productivity, risk leading inflation to be higher than expected, weakening external competitiveness. If reforms slow or do not improve the business environment, private investment may not recover from its recent slowdown and productivity growth may stall.

Fiscal and structural reforms are needed to foster investment and growth

Ending poorly-targeted energy price caps and home loan support as planned, and ensuring that future public sector wage rises match performance improvements would improve the sustainability of growth and help build fiscal buffers for future challenges. Fully implementing reforms to improve the regulatory environment, enhance the effectiveness of the judicial system and integrate higher skilled immigrant workers would encourage private investment and bolster productivity, and would help address the challenges from the green transition and the ageing population.