The World Bank in Croatia

Croatia’s economic activity has been consistently outpacing average growth in the EU over the last three years, and in 2023 Croatia's GDP per capita (in PPS) reached 76% of the EU average, up from 67% in 2019. These positive trends continued in the first half of 2024, but growth has become increasingly dependent on consumption and public investment, largely driven by rising wages, expansionary fiscal policy, and the inflow of EU funds. At the same time, productivity growth has been relatively subdued.

Moreover, the tourism sector, one of the key drivers of economic growth over the past three years, is showing signs of reaching peak capacity. Dependence on the tourism sector makes the economy vulnerable to shocks and raises sustainability concerns due to its pressures on local infrastructure and the environment. Accelerating productivity growth will be essential for sustaining income convergence in the medium to long term. However, Croatia's overall macroeconomic imbalances remain contained, given a robust banking sector, a positive current and capital account and public debt that has fallen to close to 60% of GDP.

Last Updated: Oct 24, 2024

The World Bank has been a partner to Croatia over 30 years. Since its first loan in 1994 for emergency reconstruction of war-damaged infrastructure, the World Bank has supported more than 50 projects, totaling almost $5 billion and provided knowledge and technical assistance to help strengthen institutions and support policymaking through more than 330 reports and studies.

In May 2019, a joint strategy for Croatia, the Country Partnership Framework (CPF) 2019–24, was endorsed, defining the World Bank’s engagement and focusing on building essential institutional capacity while providing support across three areas (i): improving the efficiency of the public sector institutions and delivery of services to people, creating opportunities for people, focusing on less developed regions and improving education and skills; (ii) preserving and leveraging natural capital to address environmental and climate change challenges including improving water and solid waste management; (iii) increasing the role of the private sector in the economy by improving the business environment, promoting entrepreneurship, competition and innovation, creating more and better jobs.

On April 7, 2023, the World Bank’s Board of Directors approved the Performance and Learning Review (PLR) of the Croatia CPF 2019-24, confirming that the strategy continues to be relevant as it allows the WBG to respond flexibly to the country’s unforeseen and emerging needs.

The World Bank has finalized the Croatia Systematic Country Diagnostic Update (SCD), a country engagement document, identifying key binding constraints and priority actions for Croatia to achieve inclusive, resilient, and sustainable growth. The SCD will serve as the analytical basis for the design and development of the next Strategy—the Croatia CPF 2025-2030—which is underway.

The World Bank currently provides knowledge, technical assistance and financing in the areas of, digital transformation and the green transition of the economy, justice service delivery, education, business environment, land administration, science and technology, post-earthquake reconstruction of key health and education facilities, social policy, deinstitutionalization, pension system modernization, long-term care, and public administration.

Last Updated: Oct 24, 2024

RECENT ECONOMIC DEVELOPMENTS

Economic activity in Croatia continued to expand in the first half of 2024, with annual real GDP growth averaging 3.6%, primarily driven by robust domestic demand. Personal consumption remained strong, bolstered by ongoing increases in real disposable income. Investment activity also gained momentum, with its average annual growth rate reaching double digits. This reflects the continuation of a strong rise in public investment, with private investments also gaining momentum. Employment growth was broad-based in the first half of 2024, with construction, the public sector and tourism making the strongest contributions. Wage growth further accelerated after a strong rise in 2023, reflecting a substantial increase in public sector wages following the reform of the public sector wage system in April 2024. At the same time, inflation is moderating. In August 2024 it stood at 3%, down from 5.4% at end of 2023. Poverty, as measured by the share of population living below the upper-middle income poverty line at $6.85 in PPP terms, is estimated to have declined modestly from 1.4% in 2023 to 1.3% in 2024. However, while Croatia's income inequality is below the EU average, pockets of poverty persist, and inequality of opportunity remains high. Marginalized communities, those with low education, the elderly living alone, and the unemployed are most at risk.

ECONOMIC OUTLOOK

Croatia's economic growth in 2024 is expected to strengthen compared to 2023 before moderating somewhat over the subsequent two years. Real GDP growth in 2024 is projected to reach 3.5%, driven primarily by robust domestic demand. This is underpinned by a tight labor market, expansionary fiscal policy—partially fueled by the inflow of EU funds—and a robust growth of public and private investment in the first half of the year. Growth over the next two years is expected to average 2.9%. Inflation, after averaging 4.2% in 2024, is expected to gradually decline over the forecast horizon toward the European Central Bank’s target of 2%. However, a tight labor market and still elevated wage growth could keep inflation slightly above that level. Strong wage growth in the public sector in 2024 is expected to significantly widen the fiscal deficit to nearly 3% of GDP. Nevertheless, expenditures are projected to remain restrained over the next two years, which, along with continued economic expansion, should allow for gradual fiscal adjustment and a steady decline in public debt. Poverty is projected to decline marginally to 1.1% by 2025 and then to 1% in 2026.

Last Updated: Oct 24, 2024