Important Facts of the News
- Croatia’s economy has recorded one of the fastest growth rates in the euro area.
- Real GDP is expected to grow about 3.1 percent in 2025 and 2.7 percent in 2026.
- Inflation is projected to move closer to the ECB target by late 2026 to early 2027.
- The general government deficit is close to 3 percent of GDP in 2025 projections.
- Public debt-to-GDP ratio is estimated to approach 60 percent by 2030.
- Credit and housing price growth have been rapid, increasing financial stability risks.
- Fiscal consolidation is recommended to reduce inflation and rebuild buffers.
- Reforms needed in tax structure, public wage bill, pensions, health, and education.
- Macroprudential measures have been tightened by the Croatian National Bank.
- Immigration is helping labor shortages but needs stronger integration support.
Introduction
Croatia’s economy continues to perform strongly, maintaining one of the highest growth rates in the euro area. This expansion has supported an improvement in living standards, aided partly by significant use of Recovery and Resilience Fund investments. However, signs of imbalances are emerging, particularly in fiscal spending, domestic demand and housing markets, prompting calls for early corrective steps.
Growth Prospects and Risks
Growth is projected to moderate compared to the post-pandemic period, but it is still expected to remain solid. Real GDP is forecast to expand by around 3.1 percent in 2025 before easing to 2.7 percent in 2026. Household incomes, relatively low interest rates and EU-funded investments are expected to keep domestic demand robust. Over the medium term, growth is likely to settle near its potential rate of around 2.5 percent.
Inflation is anticipated to gradually decline toward the European Central Bank’s target by the end of 2026 or early 2027. However, the current account deficit is expected to widen temporarily before improving as demand stabilizes. External risks remain notable, especially related to global uncertainty, trade conditions and potential pressures on tourism.
Fiscal Challenges and the Need for Consolidation
Croatia is currently facing rising fiscal deficits, driven mainly by higher public wage and social benefit spending. The general government deficit is estimated to remain near 3 percent of GDP. The expansion of permanent spending commitments increases rigidity in the budget and could put investment priorities at risk during economic shocks.
A stronger and earlier fiscal consolidation path is recommended to reduce inflationary pressures and maintain competitiveness. Targeting a reduction of the deficit to around 2.5 percent of GDP in 2026 could be achieved by moderating salary increases, improving VAT compliance and phasing out temporary cost-of-living support measures. Over the medium term, consolidation efforts should also aim to enhance spending efficiency and broaden the tax base.
Structural Reforms for Long-term Stability
Reforms in healthcare and education are encouraged to address efficiency concerns, improve outcomes and strengthen productivity. Pension reforms are highlighted as essential to ensure sustainability and fairness across generations. Strengthening the management of state-owned enterprises and improving the appraisal and oversight of public investment projects are also seen as priorities.
Financial System Stability
The banking sector remains profitable and well-capitalized, but increased housing credit and rising property prices require continued vigilance. Recent macroprudential measures, including borrower-based restrictions and an increase in the counter-cyclical capital buffer planned for 2027, aim to reduce vulnerabilities and secure financial resilience.
Conclusion
Croatia’s economic success provides a strong foundation, but timely policy actions are needed to contain emerging pressures and support long-term stability. Strengthening fiscal discipline, improving efficiency in public spending and sustaining reforms in key sectors will be central to maintaining growth momentum and preparing for future challenges.