In 2015, Croatia finally came out of its six-years-long recession. The sustained growth in the pre-crisis years was based on unsustainable drivers. The credit-driven consumption and investment boom resulted in the accumulation of sizeable domestic and external liabilities – mostly foreign currency denominated, while public finances maintained a broadly pro-cyclical stance. Croatia therefore entered the crisis with little room for manoeuvre and adjustment mainly relied on internal devaluation. The benefits of increased competitiveness were hampered by Croatia’s limited export base and the simultaneous economic slowdown in its main trading partners. Between 2008 and 2014, GDP shrunk by more than 12 % in real terms and unemployment surged from below 9 % to more than 17 %. The situation started to improve at the end of 2014, and in the course of 2015 real GDP growth surpassed expectations. Economic activity is currently expected to have expanded by 1.8 % in 2015. The external sector performed strongly, and Croatia recovered some of the lost market shares. Growth was however mainly driven by the rebound in consumption and — to some extent — investment.
Croatia is experiencing excessive macroeconomic imbalances. Vulnerabilities are linked to high levels of public, corporate and external debt in a context of high unemployment. The modest economic recovery is set to ease corporate deleveraging and the improvement in the current account balance should contribute to a reduction in external liabilities, but public debt is expected to continue rising. In the banking sector, non-performing loans remain high and profitability is weak. Further consolidation effort and improvements in fiscal governance are needed. Although measures have been taken to improve the insolvency framework and enhance labour market flexibility, substantial policy gaps remain requiring specific policy actions, in particular regarding governance of state owned enterprises, public administration efficiency and the resolution of non-performing loans.
Read a complete analysis of Croatia's economy in the country report 2016 [2 MB]
2015 recommendations in brief
The Commission has made six country-specific recommendations to Croatia to help it improve its economic performance. These are in the areas of: public finances and taxation; pensions and health; labour market and wage-setting; public administration and state-owned enterprises; services and justice system; insolvency and financial sector.