Croatia Economic Forecast

Year-on-year economic growth ticked down to 2.7% in Q2 from 2.8% in Q1. Fixed investment lost steam due to weaker construction activity, likely dragged down by higher interest rates. Moreover, exports swung into contraction amid soft external demand. On the flip side, private consumption growth picked up on the back of lower inflation and unemployment. Turning to Q3, available data suggests that underlying momentum is fading. In July, the unemployment rate rose, while industrial output fell in both annual and monthly terms. Moreover, economic sentiment averaged lower in July–August relative to Q2’s level amid reduced optimism in the industrial and services sectors. Against this backdrop, our panelists are penciling in a sequential contraction for Q3. That said, they see annual growth remaining healthy thanks to a more favorable base of comparison.

Inflation ticked up to 7.7% in August from July’s 7.4%. The increase was chiefly driven by a rebound in transportation inflation. Our panelists see inflation falling during the remainder of the year thanks to a high base effect and elevated interest rates. A persistent labor shortage is a factor to watch, while higher energy prices are an upside risk.