Croatia Economic Forecast

In the fourth quarter, annual economic growth slowed to 3.5% amid softer private consumption and export growth. Looking at Q1, high-frequency data suggests a further weakening in growth. In the quarter, industrial production contracted at a sharper rate relative to Q4, while business sentiment and retail sales growth weakened. More positively, in Q1, consumer sentiment improved, and inflation and unemployment rate decreased relative to Q4. Additionally, real wages and tourist arrivals rose in year-on-year terms, likely supporting private consumption and service exports, respectively. For Q2, the economy is set to continue growing. The still-tight labor market and cooling inflation are likely buoying private consumption, and the anticipated good tourist season will be boosting services exports. On the contrary, monetary policy tightening will be weighing on investment.

Inflation dropped to 8.8% in April, below March’s 10.7%, amid smaller price rises for food and housing. Our panelists see further declines in inflation later this year due to a high base effect and cooling demand. A continuation of labor shortages, higher housing prices spilling over to rents and faster-than-expected nominal wage increases are upside risks to the outlook.