Croatia: Economic outlook affirmed

2Q25 GDP growth accelerated to 3.4% y/y (vs. 2.9% in 1Q), lifting the 1H performance to 3.2% y/y and landing marginally above expectations. Domestic demand remained the backbone, with consumption (+4.0% y/y) and investments (+5.2% y/y) looking solid, while net exports weighed on the figures, as imports outpaced exports, with the tourism contribution looking flat. In 2H25, growth should moderate modestly, but remain overall sound and supported by domestic demand, while exports remain the headwind, along with a likely flat high season tourism contribution. We keep our FY25 GDP call at 2.8%, with risks more balanced after the robust 1H25.

After some moderation towards mid-year, July–August inflation prints (both at 4.1% y/y) brought some deviation from the anticipated disinlfaton path, lifting YTD CPI to 3.7%. Pressures remained largely demand-driven, with food and services as key factors, while energy and industrial goods continued to demonstrate mostly benevolent developments on the supply side. A similar narrative is seen prevailing towards the YE25, with the headline likely remaining shaped by demand-side factors. A base effect should ease the momentum to some extent, but we now see the annual average just above 3.5% (≈0.5pp above our initial call).

YTD fiscal figures highlight risks to the official 2.3% of GDP deficit target, with VAT intake falling behind expectations and expenditures, most notably wages/pensions, at risk following the strong momentum from last year. Hence, our baseline remains some fiscal deterioration, but still with a budget gap within the Maastricht boundaries and overall more limited fiscal buffers to respond to potential shocks. Rating agencies, as in 1H25, are expected to stay on hold in 2H25. Net financing needs, after the pre-summer financing round, are largely met, leaving only T-bill rollovers. Yields remained steady just above 3%, with spreads holding strong at 40–50bp, a range likely to prevail into YE25 under the baseline of the Bund drifting towads the 2.50% zone.  

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