Croatian National Bank Raises 2025 Inflation Forecast to 4.2%

The Croatian National Bank (HNB), often referred to as CNB, has released its latest macroeconomic projections in September 2025, signaling a notable uptick in inflationary pressures for the coming year while anticipating a moderation in economic expansion. This update revises earlier estimates from June, reflecting heightened contributions from food and energy costs. As Croatia navigates its position within the eurozone, these forecasts underscore the interplay between domestic demand, global commodity trends, and structural shifts in key sectors like tourism. With real GDP growth projected to average 3% annually over 2025 and 2026-down from a robust 3.9% in 2024-the economy remains resilient but faces headwinds from decelerating external demand and internal cost dynamics.

Key Drivers Behind Accelerating Inflation

Inflation in Croatia, as measured by the harmonized index of consumer prices (HICP), is now expected to climb to 4.2% in 2025, up from the 4% recorded in 2024. Similarly, the national consumer price index (CPI) is forecasted to rise to 3.6%, compared to 3% last year. This upward revision marks a departure from the more optimistic June projections, where HICP was pegged at 3.6% and CPI at 2.8% for 2025. The primary culprits are surging energy and food prices, which have gained momentum due to a combination of administrative adjustments, supply chain disruptions, and persistent wage pressures.

Energy costs stand out as the dominant factor, with administrative hikes in gas, electricity, and district heating prices scheduled for late 2024 and early 2025. These changes stem from the phasing out of temporary subsidies introduced during the post-pandemic energy crisis and Russia's invasion of Ukraine. According to HNB analysis, energy inflation could accelerate sharply in the short term, echoing patterns seen across the eurozone where the European Central Bank's September 2025 staff projections anticipate headline inflation at 2.1% for the region in 2025, still above the 2% target. In Croatia, this could add up to 1.5 percentage points to overall HICP, exacerbating household budgets already strained by prior volatility.

Food inflation, while secondary, is no less concerning, with year-on-year increases hitting 6.6% in August 2025 and peaking at 7% in July. This surge is attributed to elevated global commodity prices for staples like grains and dairy, compounded by domestic factors such as higher wage costs being passed on by producers and robust consumer spending. The HNB highlights that strong domestic demand-fueled by real disposable income growth-has amplified these pressures, creating a feedback loop where higher prices for essentials erode purchasing power. Broader context from the International Monetary Fund's World Economic Outlook (updated April 2025) supports this, noting that food price volatility remains a key risk for emerging European economies, potentially delaying disinflation by 0.5-1% in affected nations.

In contrast, core inflation-excluding volatile energy and food components-is projected to ease, driven by moderating industrial producer prices and service costs. This deceleration aligns with weakening global demand and the spillover effects of a stronger euro, which cushions imported inflation. However, the HNB cautions that upside risks persist, including geopolitical tensions in energy markets or unexpected wage spirals, which could push inflation beyond these estimates.

Sustained but Moderating Economic Growth

Despite the inflationary uptick, Croatia's economy is poised for continued expansion, albeit at a tempered pace. Real GDP growth is forecasted to average 3% over the 2025-2026 horizon, a slowdown from the 3.9% acceleration in 2024. This trajectory reflects a normalization after years of post-COVID rebound, supported by structural tailwinds like EU recovery funds and infrastructure investments.

Domestic demand will remain the engine, with private consumption bolstered by rising real disposable incomes. Wages and employment gains are expected to sustain household spending, though at a reduced clip-real wage growth is projected to dip to around 6% in 2025 from nearly 12% in 2024. Investment activity, which surged nearly double-digits over the past three years, will moderate but stay vigorous, thanks to inflows from the EU's NextGenerationEU program totaling over €6.3 billion for Croatia through 2026. These funds are earmarked for green transitions and digitalization, potentially adding 0.5-1% to annual GDP via public works and private sector upgrades.

On the external front, net exports may provide a modest drag, as eurozone growth-projected at 1.2% in 2025 by the ECB-remains subdued. Croatia's trade balance is expected to benefit from a slight current account surplus of around 2.3% of GDP in 2025, up from 2.2% in 2024, driven by service exports. Yet, uncertainties from U.S. trade policies and global fragmentation, as flagged in the OECD's June 2025 Economic Outlook, could shave 0.2-0.3% off growth if supply chains disrupt further.

Overall, these projections position Croatia as an outperformer in Central and Eastern Europe, with real convergence to eurozone averages continuing at a steady clip.

Evolving Labor Market Dynamics

The labor market's strength underpins much of the growth outlook, but signs of cooling are emerging. Employment growth is anticipated to ease from 3.3% in 2024 to 2.7% in 2025 and 1.8% in 2026, reflecting a maturing recovery and demographic constraints like an aging population. Unemployment is set to edge lower, from 5% in 2024 to 4.7% in 2025 and 4.5% in 2026, maintaining near-historic lows.

Wage pressures are a double-edged sword: average nominal gross wages, after two years of 15% hikes, are expected to grow just under 10% in 2025. This moderation helps contain core inflation but still supports real income gains amid the projected price rises. The HNB attributes this to tight labor supply in sectors like construction and hospitality, where skill shortages persist. Broader eurozone trends, with ECB projections showing wage growth at 3.5% in 2025, suggest Croatia's dynamics are somewhat elevated, potentially warranting vigilant monetary oversight.

Tourism Sector: A Mixed Outlook with Competitiveness Concerns

Tourism, accounting for nearly 25% of GDP, faces a pivotal moment. Real service exports are projected to grow marginally in 2026 compared to 2024 levels, hampered by eroding price competitiveness. Soaring operational costs-up 20% in some coastal areas due to energy and labor expenses-have led to higher accommodation and dining prices, deterring budget-conscious European visitors.

Compounding this, rising domestic incomes have spurred outbound travel, with Croats increasingly opting for affordable destinations in Montenegro or Turkey. Service imports are thus surging, potentially widening the trade gap in travel-related flows by 5-7% year-on-year. The HNB warns that without productivity gains or targeted subsidies, this shift could cap tourism's contribution to GDP at under 1% growth in 2025. Positive notes include diversified offerings like eco-tourism and year-round events, which could mitigate seasonality risks.

In summary, the HNB's September update paints a picture of a resilient yet challenged Croatian economy. While inflation's rebound poses policy dilemmas-potentially influencing ECB-aligned interest rate paths-the foundations for 3% growth remain solid. Stakeholders will watch closely as fiscal measures and global events unfold.