Croatia

Continued strong growth in 2025

In 2025, growth is expected to remain robust, surpassing the eurozone average. It will be supported both by the recent entry into the Schengen area and the adoption of the euro in 2023, as well as by the continued absorption of EU funds (EUR 10 billion for 2021-2026, roughly 12% of GDP, of which only 30% has been used). Private consumption should remain a significant growth driver, supported by a robust labour market (the unemployment rate stood at 5% in November 2024). Although slowing inflation strengthens household purchasing power, the expected rise in energy prices at the beginning of the year could moderate the growth of real incomes. Tourism (25% of GDP) will continue to strengthen with the expansion of air connections, notably through the introduction by Croatia Airlines of eight new international routes. The fiscal policy adopted for 2025 will be decidedly expansionary, relying on a 10.2% increase in spending, the purpose of which is to stimulate growth and strengthen social and demographic policies. Meanwhile, although European monetary policy is easing, its impact on economic activity is expected to be only fully felt from 2026 onwards.

Growth will also be supported by investments, particularly in the construction of tourist complexes, transport infrastructure, energy diversification and the production of automotive parts. Croatia plans to invest EUR 6 billion over a decade to modernise half its railway network. This large-scale project will stimulate the economy by improving accessibility and promoting more sustainable transportation. Manufacturing recovery (20% of GDP) will be boosted by the Rimac Campus project in Kerestinec, near Zagreb. The EUR 300 million investment by Rimac Automobili will create a major electric car development and production complex that will employ 2,500 people. The partnership with BMW for high-voltage batteries highlights strong potential in the cutting-edge electric automotive industry for the coming years. However, the country faces unfavourable demographics and a low level of R&D investment in, which could compromise its long-term growth prospects.

Social spending and public investment are widening the deficit

After a modest deficit recorded in 2023, public finances are expected to continue deteriorating in 2024-2025, mainly on back of increased public investment, social spending and the implementation of a public sector salary reform. Despite the approach, public debt should continue its downward trajectory thanks to robust growth and optimal use of European funds. The government plans to initiate fiscal consolidation measures starting in 2025, through the gradual elimination of energy subsidies and the reinstatement of health contributions for young workers.

The current account balance should remain close to equilibrium. The structure of the current account reveals a significant chronic trade deficit, offset by a strong surplus in services, thanks to tourism revenues. Foreign direct investment (FDI), mainly from the European Union, remains an essential pillar of external financing, with a notable concentration in financial services (25%), manufacturing (18%), and real estate (17%). The country is less vulnerable than other EU countries to a likely increase in US tariffs on European exports in 2025. This is due to the small share of goods exports destined for the US and the fact that the service sector accounts for a much larger share of growth than the industrial sector. Since joining the eurozone in 2023, Croatia has benefited from access to the ECB's pooled foreign exchange reserves, which has significantly strengthened its financing capacity.

Tense local political landscape

The April 2024 legislative elections saw the centre-right conservative Croatian Democratic Union (HDZ) party led by Prime Minister Andrej Plenkovi? retain its dominant position despite a minor loss of seats (61 seats compared to 66 previously out of a possible 151). The HDZ formed a coalition with the far-right Patriotic Movement (14 seats) to keep Plenkovi? in power for a third term, while the centre-left opposition made gains in a context of high voter turnout. The political landscape will continue to be tense with the landslide re-election of Zoran Milanovi? as President of the Republic on 12 January 2025, after securing 75% of the vote. This overwhelming victory is an indicator of the country's polarisation and of the complicated cohabitation between Milanovi? from the Social Democratic Party, who holds populist and nationalist positions critical of the EU and NATO, and Plenkovi?, who is firmly pro-European. Nevertheless, the President's role remains limited and is more a ceremonial than an executive function. Their ideological differences, particularly in foreign policy and support for Ukraine, are manifested in frequent public disagreements. The next legislative elections are scheduled for 2028, barring an early dissolution of Parliament.

On the social front, the country faces major demographic challenges, with a rapidly ageing population and significant emigration of skilled young people. The government has announced measures to stimulate birth rates, including the doubling of family allowances. In terms of foreign policy, Croatia has border disputes with several neighbours, notably Slovenia regarding the Bay of Piran, and Serbia concerning the border along the Danube. The country also remains divided on its involvement in supporting Ukraine, with President Milanovi?'s recently refusing to authorise Croatian participation in NATO's training mission for Ukraine.

Last updated: January 2025