Macroeconomic projections aim to predict and understand the future state of the economy on a broad scale. They include the projections of economic growth, inflation, wages, unemployment and trade. The Eurosystem and European Central Bank (ECB) staff produce macroeconomic projections for the euro area and the wider global economy. Macroeconomic projections contribute to the ECB Governing Council’s assessment of economic developments and risks to price stability (ECB). Since joining the euro area, the Croatian National Bank (CNB) has been producing two basic Eurosystem macroeconomic projections, along with the ECB and other national central banks. These projections: are published in June and December. In addition, twice a year, in March and September, the ECB independently updates these projections for the euro area, while the CNB independently updates the projections for Croatia.

The external environment remained relatively favourable at the beginning of 2026, but the escalation of the Middle East conflict in March significantly changed economic circumstances and considerably raised the uncertainty surrounding the macroeconomic outlook. The war in Iran disrupted the supply of energy products and fuelled a sharp increase in their prices, with very large fluctuations, all of which had an unfavourable impact on financial markets as well. As a result, the ECB revised downwards its short-term outlook for euro area growth, after economic activity continued to grow robustly in the first two months this year, as implied by available data. The rise in energy prices and heightened uncertainty are expected to dampen domestic and foreign demand and, at the same time, push inflation higher. However, this will depend on the intensity and duration of the conflict and the extent to which the energy shock spills over to the economy. The baseline scenario assumes that energy prices will follow the path of futures prices prevailing until 11 March 2026, pointing to a gradual decline in oil and gas prices after their peaks in the second quarter of this year, which is consistent with the relatively short-term conflict. In the baseline projection, the effects of disturbances are relatively contained so that, after growing in 2026, euro area inflation is expected to return close to the target by the end of the projection horizon, with economic activity being slightly lower than expected prior to the Middle East war. The ECB has outlined risks to growth and inflation emerging from a more intensive and longer-lasting conflict in alternative scenarios.

Amid the Middle East war, the baseline scenario projects slightly lower economic growth in Croatia over the projection horizon than expected in the December 2025 projections, with an average growth rate of 2.5% in 2026 and 2027. Real GDP growth projections have been revised slightly downwards compared with the December projections, assuming that the conflict in the Middle East will be relatively short-lived and that energy prices will start to drop to their levels before the Iran war as early as the second quarter. Although the carry-over effect from 2025 to the annual growth rate in 2026 is slightly higher than expected due to the strong intensification of activity in late 2025, the rise in energy prices and heightened uncertainty might somewhat weaken domestic demand and exports of goods and services relative to expectations. Real GDP growth could decelerate in 2026 from 2025 under the impact of lower expected growth in real income, a less supportive fiscal policy, heightened economic uncertainty and unfavourable borrowing conditions for households. However, growth should remain relatively strong, largely due to a robust labour market and a larger use of EU funds than in the previous year. Personal consumption growth is expected to accelerate in 2026, which is attributable to the positive base effects of the boycott of retail chains in early 2025 and subdued consumption over the summer months. Economic growth could continue to slow down marginally in 2027, which, coupled with a further deceleration of real disposable income growth, largely reflects the expected downsizing of government investments due to lower absorption of funds from the Recovery and Resilience Facility. On the other hand, assuming a de-escalation of conflicts, external demand could be somewhat stronger, spurring growth in the exports of goods and services.

The labour market is expected to see a greater slowdown in employment growth and a lower slowdown in nominal wage growth than previously anticipated. The downward revision of employment growth primarily reflects recent developments, which suggest that in late 2025 and early 2026 employment has held steady since mid-2025, despite the strong growth in real activity. This was apparently also due to labour supply factors associated with the tightening of employment conditions for foreign workers, as well as weaker demand for labour following relatively strong employment in 2024 and a high share of labour costs in value added. Employment growth is expected to slow down further in 2027; given the low unemployment rate, the increase in the number of employed persons will continue to dependent mostly on the stronger participation of the working-age population, the activation of pensioners and employment of foreign workers. Wage growth could decelerate over the projection horizon, with the projection for nominal wage growth revised upwards, partly reflecting the current situation, and the projection for real wage growth revised slightly lower due to higher expected inflation.

Amid the sharp increase in energy prices, inflation is expected to accelerate in 2026, before slowing down again in 2027. The average annual rate of inflation measured by the harmonised index of consumer prices (HICP) could accelerate in 2026 to 4.6%, from 4.4% in 2025, while the average annual rate of inflation measured by the national consumer price index (CPI) could pick up from 3.7% to 4.4%. Compared to the December forecast, inflation projections have been revised up, particularly for 2026, due to the rise in energy prices, while core inflation (which excludes volatile energy and food prices) is also expected to be higher. The main generator of the faster growth in energy prices in 2026 than in 2025 is the expected spillover of the spike in global crude oil prices to retail prices of refined petroleum products. To a lesser extent, the projected faster increase in energy prices in 2026 is due to administrative energy prices, which mostly grew in late 2025 and early 2026 and have largely been included in the December projection. Higher prices of energy and other raw materials could spill over gradually to other inflation components, so that, in line with the assumptions about the trends in global food prices, the growth of food prices could slow down in 2026, while core inflation could accelerate only slightly, given that the slower growth of economic activity and wages, subdued demand for tourist services, as well as a less supportive fiscal policy should reduce general inflationary pressures. In addition, the CNB’s macroprudential measures aimed at restricting credit-financed household consumption, introduced in July 2025 to preserve financial stability, are also expected to alleviate domestic inflationary pressures. Amid the low current inflationary pressures, inflation is expected to slow down in 2027 (to 2.8% measured by the HICP and 2.7% measured by the CPI), while inflation of all main components is expected to weaken, the only exception being food price inflation due to the lagged spillover effects of previous increases in the prices of energy and other production inputs. The expected slowdown in energy inflation stems from the assumption that global crude oil prices will fall, while core inflation should decrease due to the steady easing of domestic inflationary pressures associated with the projected further slowdown in personal consumption and wage growth, and a restrictive fiscal policy.

Rising energy prices will adversely affect terms of trade, which is why the current account deficit is expected to widen more than previously expected. While the 2025 results exceeded projections, the current account deficit might be slightly larger in 2026 than foreseen in previous projections, primarily due to the rise in energy prices, given that Croatia is a net importer of oil and gas. Also, the services balance is expected to deteriorate in view of the weakened price competitiveness of Croatia’s tourism. On the other hand, a positive capital account balance might grow further in 2026 due to the larger use of Recovery and Resilience Facility funds (most of these funds should be used by the end of the current year). The current and capital account deficit is expected to stagnate in 2027. The goods and services balance might improve due to the gradual normalisation of energy prices and the strengthening of foreign demand, while the capital account balance might deteriorate as the smaller use of funds from the regular EU financial envelope is unlikely to fully offset the lower use of Recovery and Resilience Facility funds.

The crisis in the Middle East has increased downside risks to GDP growth and upside risks to inflation. Risks to real GDP growth and inflation projections are primarily associated with the evolution of the Middle East situation, developments in energy prices and their spillover to the prices of other goods and services. In the event of a prolonged conflict and additional difficulties in energy supply, energy prices could rise even more and remain elevated for longer, which could result in growth being lower and inflation being higher than expected. A stronger spillover of higher energy prices to the prices of other goods and services could also push inflation above projections. An additional risk is posed by second-round effects in the form of elevated inflationary expectations as well as higher wage growth and faster price increases amid the rising costs of living and doing business. On the other hand, the rise in borrowing costs might exceed current expectations of financial markets, possibly alleviating inflationary pressures. Fiscal measures aimed at limiting the impact of rising energy prices could also mitigate risks to growth and inflation. It should be noted that risks to tourism appear to be two-sided. On the one hand, uncertainty could redirect some European travellers from Asian destinations to Croatia, which could result in stronger-than-expected growth of services exports, but it could also reduce demand for tourist services. Moreover, reduced connectivity through air hubs in the conflict-affected region makes overseas arrivals much more difficult, especially from Asian countries.

In view of the elevated uncertainty, two alternative hypothetical scenarios were prepared together with the baseline projection to show risks to growth and inflation if consequences of the conflict prove to be more severe and longer lasting. The assumptions embedded in the alternative scenarios rely on the possibility of a longer-lasting disruption in oil and gas supply, with an adverse effect on economic growth and inflation, especially in the short term. These scenarios may reflect a longer-lasting and more intense conflict and enable a quick impact assessment of the possible materialisation of these risks on economic developments in the context of exceptionally high uncertainty.

The effects on growth and inflation under alternative scenarios depend on four key factors: the intensity of the initial energy supply shock, the duration of disturbances, the level of uncertainty and, finally, the impact of these factors on foreign demand. The adverse scenario assumes that oil prices will grow to around USD 120 per barrel in the second quarter and gas prices will increase to almost EUR 90 per MWh, after which they could start to decrease; by contrast, the baseline assumes maximum oil and gas prices of USD 90 per barrel and EUR 50 per MWh, respectively. In the severe scenario, oil and gas prices go up even more, to almost USD 150 per barrel and EUR 110 per MWh, respectively, in the second quarter of 2026, before starting to decline. However, the severe scenario assumes a much slower normalisation of energy prices, so that, by the end of 2027, oil and gas prices could remain elevated at levels above USD 100 per barrel and around EUR 60 per MWh, respectively. In addition to the stronger growth in energy prices, alternative scenarios assume greater uncertainty and stronger indirect and second-round effects, reflected in growing inflationary expectations, higher growth in labour costs and faster price increases by corporates amid growing costs.

Figure 1 Technical assumptions of the baseline and alternative scenarios
a) Oil prices

Sources: CNB and ECB.

b) Gas prices

Sources: CNB and ECB.

c) Economic Policy Uncertainty Index

Sources: EPU and CNB.

Under the adverse scenario, the impact on economic activity and inflation might be moderate, while under the severe scenario growth could be considerably lower and inflation might be noticeably higher than in the baseline scenario. In the adverse scenario, real GDP growth could be lower than the baseline by 0.5 percentage points in 2026 and 0.4 percentage points in 2027. HICP inflation could exceed the baseline by 1.0 percentage point in 2026, mainly due to higher energy prices, while in 2027, the deviation from the baseline is smaller, at 0.6 percentage points, reflecting falling energy prices. By contrast, stronger indirect effects in terms of production costs and the lagged pass-through of cost pressures to wage growth work in the opposite direction. Under the severe scenario, the energy shock and global disruptions could have much stronger and long-lasting effects on real activity and inflation. GDP growth could be 0.8 percentage points and 1.1 percentage points lower in 2026 and 2027 respectively than in the baseline, reflecting weaker personal consumption due to much slower growth in real disposable income and increased caution by households. In addition, heightened uncertainty could also significantly affect the dynamics of private investments, while sluggish external demand might unfavourably affect the exports of goods and services. HICP inflation is 2.4 percentage points and 3.0 percentage points above the baseline in 2026 and 2027, respectively. Coupled with the strong direct impact on energy prices, indirect effects could play a significant role in the severe scenario due to their impact on inflation expectations, wages and prices and, consequently, core inflation in 2027.

Table 1 Current macroeconomic projections for Croatia
(year-on-year change, unless otherwise indicated)

Note: The external and technical assumptions of the ECB were finalised on 11 March 2026 and the macroeconomic projections for Croatia on 17 March 2026.
The European Central Bank (ECB) published its projection for the euro area.
Download table (xslx)

Table 2 Croatia’s real growth and inflation projections under alternative scenarios

Source: CNB.