Croatia Economic Forecast

The economy is expected to have lost steam in Q2, primarily due to a strong statistical effect as a result of a high base of comparison. Despite this, underlying economic data paints a bright picture. In Q2, consumer sentiment improved, which, together with double-digit wage increases and lower unemployment, should have aided consumer spending, as indicated by year-on-year retail sales growth exceeding that of the previous quarter. Additionally, industrial production in Q2 rebounded from Q1’s contraction, and tourist arrivals boomed in annual terms. On the downside, tighter financing conditions and still-elevated inflation likely capped investment. Furthermore, weak demand from key trading partners, along with reduced labor cost competitiveness, likely put a lid on goods exports.

Inflation fell to 7.4% in July, below June’s 7.6%, amid a moderation in price pressures for food and housing. Our panelists anticipate a decline in inflation from July levels later this year, attributed to the high base effect. Upside risks include persistent labor shortages, an unexpectedly robust tourist season and the prospect of price hikes for European gas.