Uncertainty as common denominator
The economy expanded by 7.4% y/y in 1H22 and resilient domestic demand and strong tourism are paving the way to another strong year as far as GDP growth is concerned; we upgraded the 2022 call to 5.5%. As we progress towards 2023, the outlook is getting more blurred, as global factors weigh more on the growth prospects. Private consumption is facing inflation headwinds, while the deteriorating EU growth outlook and energy crisis hamper the export outlook. Tourism, after full normalization in 2022, is now facing a more moderate growth outlook, while the investment outlook remains solid amid ample EU fund flows. We keep our call for 2023 at 2.1%, with downside risks prevailing.
The inflation outlook continued to deteriorate, as headline CPI moved north of 12%, due mainly to supply shocks. The averages in 2022 and 2023 are now seen at 10.5% and 6.5%, respectively, anticipating a peak in the coming months and still recognizing upside risks. The government utilized its comfortable fiscal position and delivered an anti-inflation package aimed at anchoring inflation pressures, while not jeopardizing the fiscal position. Following a 2-notch upgrade from S&P and Moody’s and one additional one from Fitch, Croatia is now positioned deep within the IG region. As far as monetary policy goes, the focus gradually shifts towards the ECB amid looming euro adoption.