"Strong wage growth owing to a tight labor market has kept gross real wage growth in positive territory this year, boosting private consumption beyond our previous expectations. We now forecast real GDP growth at 2.5% for 2023, up from the 1.7% we anticipated in March," the rating agency said.
"In addition, we consider opportunities for a strengthening of the economy's resilience and productive capacity could result from the successful implementation of Croatia's National Recovery and Resilience Program," the agency said. More broadly, we believe institutional progress could facilitate improvements in productivity, the business environment, and efficiency of the public sector and judiciary, and spur further income convergence with the EU average.
"Near-term risks to our forecasts would result from worsening consumer sentiment in continental Europe, the agency said. Croatia directs about 25% of its goods exports to Germany and Italy, making it vulnerable to economic developments of these key EU trading partners, the agency noted.
"We also consider persistent labor shortages, in particular in construction and seasonal tourism services, to constitute a risk to Croatia's productive capacity. We estimate that Croatia will have to attract about 200,000 (5% of its population) foreign workers to satisfy the needs of its labor market," the agency said.
Positively, Croatia has diversified its sources of energy and fuel supply over the past 18 months, in particular following the establishment and ongoing expansion of the Krk liquified natural gas terminal and advanced seaborne oil supply substitution, the agency said.
"We expect the government will remain committed to its reform program, receive significant EU financing, and maintain fiscal prudence to gradually rebuild the fiscal space it lost as a result of the pandemic. We forecast gross general government debt will reduce to lower than 60% of GDP by 2026," the agency concluded.