Croatia continues to achieve robust growth, according to a report from Erste Group. The report highlights Croatia's strong GDP growth in the second quarter of 2024, with a year-on-year increase of 3.3% and a quarterly growth rate of 0.8%, seasonally adjusted. 

This robust performance is primarily driven by domestic demand, with private consumption surging by 6.1% y/y and investments maintaining double-digit growth at 12.9% y/y, the bank’s analysts said. 

Erste projects that Croatia's domestic demand will continue to drive economic growth, citing "strong labour market fundamentals on the consumption side and EU fund backing on the investment side." However, the report notes that while tourism exports remain steady, the sluggish growth in the wider EU economy could hinder a more substantial recovery in goods exports.

Erste has maintained its full-year 2024 GDP growth forecast at 3.4%, acknowledging that risks remain slightly tilted to the downside. The report says: "We maintain our FY24 call at 3.4%, with risks tilted modestly to the downside.”

This is slightly below the 3.6% increase recently forecast by the Croatian National Bank (HNB), up from the 3.1% estimate in June. The HNB said in its latest forecast that growth is driven by strong domestic demand, rising household incomes and a boost in investment. Investments are expected to grow at a double-digit rate, particularly in both public and private sectors.

Meanwhile, inflation in Croatia has been on a moderating trend, aided by supportive supply-side factors. Nonetheless, demand-side pressures persist, contributing to inflation rates above the EU average. Erste estimates that the average Consumer Price Index (CPI) inflation for 2024 will hover around 3%. The report mentions "demand-side pressures kept services inflation in higher gear”, attributing this trend to factors such as strong real wage growth and a tight labour market.

The country's fiscal outlook is also addressed in the report. Erste expects the budget deficit to widen to 2.5% of GDP in 2024, partly due to pre-election spending. With the 2025 budget in view, the report suggests that a stronger fiscal consolidation effort seems unlikely at this stage. However, Croatia received a boost from S&P with a credit rating upgrade to ‘A-’ and a positive outlook, signalling the potential for another upgrade in the next one to two years. Erste predicts that "Fitch and Moody’s are likely to act in a similar fashion."

Erste's report also touches on the political landscape in Croatia, noting that recent polls show a volatile pattern. The upcoming presidential election is likely to have implications for economic policy, but for now, President Milanovic appears to be the front-runner for a second term. This political stability, combined with a favourable economic outlook, positions Croatia to continue on its growth trajectory in 2024.