World Bank lifts Croatia's ‘24 GDP growth f'cast, cuts ‘25 projection

"The medium-term outlook is relatively favourable due to robust domestic demand, underpinned by a tight labour market, a strong inflow of EU funds, and slowly improving external demand," it said in its report Europe and Central Asia Economic Update.

Croatia's economic growth at 2.8% remained well above EU average in 2023, supporting income convergence, the World Bank said.

The global lender expects the Adriatic country's economic growth to accelerate to 2.8% in 2025, down by 0.2 percentage points compared to the bank's previous prediction. For 2026, it expects economic growth of 2.7%.

Inflation is set to continue its declining trend and gradually narrow towards the European Central Bank target of close to 2% by the beginning of 2025, but risks remain given upward wage pressures, the global lender said.

"At the same time, fiscal balance is expected to worsen significantly in 2024, largely reflecting rise in wage bill and social benefits, but it is set to remain relatively contained over the forecast horizon," it added.

The lender forecast a fiscal balance deficit of 2.3% of GDP in 2024, 1.8% in 2025 and 1.6% in 2026, following a deficit of 0.3% in 2023.

Together with continued nominal economic growth, this will allow for a further decline in the public debt-to-GDP ratio that is forecast to reach 56% at the end of 2026, the World Bank said.

The World Bank warned that there remains ample room to improve the quality of the institutional framework and to address shortcomings in the business environment, two of Croatia's long-standing issues.

"Lifting potential growth through structural reforms that augment productivity over the next couple of years will be especially important in the context of possible reduction in EU funds available to Croatia in the post-2030 period and still relatively low labour market participation and adverse demographic trends," it added.

It estimated that the net inflow of foreign direct investments (FDI) to Croatia as percentage of GDP will decline to 3.4% in each of 2024 and 2025 and to 3.2% in 2026. It stood at 5.4% of Croatia’s GDP in 2022 and 3.5% in 2023.

"Net inflow of FDI remained significant but a large share of investments in real estate makes it less relevant for raising the country’s growth potential," the World Bank said.

Poverty has likely stayed stagnant at 1.4% in 2023 and the World Bank said it is expected to gradually fall to 1.0% by 2026.