Republic of Croatia

Croatia has continued to grow rapidly, still among the highest in the euro area, but imbalances are emerging. Procyclical fiscal policy driven by rising spending has exacerbated demand pressures, contributing to higher inflation and current account deficit. Credit growth has been rapid and housing prices have risen strongly. Against a weak external environment and elevated global uncertainty, staff projects growth to moderate to a still solid pace of around 3 percent in 2025–26, with inflation moving toward the ECB’s target in late 2026 or early 2027. The current account deficit is expected to widen in the short run before improving over the medium term while the fiscal deficit is projected to average marginally below 3 percent of GDP during 2025–30. Risks to growth are broadly balanced while risks to inflation are tilted to the upside.