Croatia Outlook | Weathering global headwinds?

CEE Macro Outlook , 18. März
The economy delivered another strong quarter, as GDP grew 3.7% y/y in 4Q24, wrapping up FY24 GDP growth at a robust 3.8%. Strong domestic demand remained the backbone of growth as private consumption and investments saw ongoing steady expansion. As far as the 2025 outlook goes, we continue to expect GDP growth to remain in decent gear at around 3%. Domestic demand is anticipated to continue to support above-EU average growth momentum, although at a more moderate pace compared to what we saw in 2024. Risks are tilted to the downside, mostly owing to the external environment and growing uncertainty on a global level.

For inflation, we see the headline figure hovering in the 3-4% range for the majority of 2025, with the average landing slightly above 3%, hence maintaining the above-EU trend as demand-side pressures are seen as persisting. Food price indices still suggest a bumpy ride ahead, while energy prices and supply-side factors should play a more neutral role. Fiscal news flow has been scarce since our last report, thus we are awaiting details on the 2024 fiscal results, where the government is targeting a 2.1% of GDP budget gap. The target for 2025 is set at 2.3% of GDP, where budgeting assumptions suggest more limited maneuvering space in the event of negative risks materializing, hence our call of a marginally higher budget gap (2.5% of GDP). As suggested by the maturity profile, the MoF has been working diligently in 1Q25, with issuance seen as landing in excess of 7% of GDP, thus roughly meeting 2/3 of the FY25 funding needs. Both Fitch and S&P remained on hold as expected in their recent rating updates, which, following another round of rating upgrades in 2024, remains our baseline for the remainder of 2025. Yields again kept up a volatile trajectory, mostly reflecting strong benchmark swings. Despite the 10Y yield moving closer to the 3.5% level recently, spreads showed some additional tightening towards the 50bp region, supporting our recent downward revision of spreads towards the 60-70bp region for the upcoming quarters.