A column by Governor Boris Vujčić in Poslovni dnevnik (special edition) was published on 4 December 2024.

Economic science has long been trying to get closer to the natural sciences by using theoretical models and empirical testing of hypotheses by means of quantitative methods. By irony of fate, economic science has indeed become similar to natural science, but in a somewhat unexpected way – facing problems in describing economic reality and forecasting future developments. Natural sciences collided with such problems a hundred years ago at the level of fundamental particles. Stephen Hawking has recently, polemicizing with the already deceased Einstein, who could not come to terms with the restrictions imposed, described the difficulties faced by the physics of elementary particles - "Not only does God play dice, but he sometimes throws them in the dark where they cannot be seen." Similarly, rolling dice in the dark would sometimes produce better forecasts than those given to us by standard economic models during the pandemic and the ensuing recovery. The duration of the projections in the conditions of major disturbances and unusual reactions of the economy was very short, so it would often happen that the projections become obsolete almost immediately upon publication.

Fortunately, it seems that the period in which extremely rapid changes in the economic environment significantly reduced the reliability of model projections is behind us. In the words of Fabia Panetta, a fellow governor of the Bank of Italy, we completed a long journey through terra incognita and again found ourselves in a familiar area. And this area of ours is not without a signal. In fact, the signals we receive are still very favourable. Economic activity in Croatia continues to grow strongly, so that the real GDP growth rate could decrease only slightly next year, remaining above three percent. Personal consumption and investment should remain the main sources of growth, although with slightly lower contributions than this year, since the growth of real wages can be expected to slow down from the very high, double-digit level recorded this year. The double-digit investment growth seen this year under the influence of strong private sector investment activity is also unlikely to recur. On the other hand, the continued gradual strengthening of the European economy should have a favourable effect on goods exports, which will partly compensate for the weaker growth in domestic demand.

Inflation is expected to continue to decline, from an average of 3.9% this year to 3.5% next year, according to the September CNB's projection. The rise in energy prices, after two years of stagnation, should obscure a considerable fall in the so-called core inflation, i.e. inflation that excludes very volatile food and energy prices, which are poorly responsive to changes in monetary policy. In line with the common approach of all central banks in the Eurosystem, the CNB projects the so-called Harmonised Index of Consumer Prices, which also includes tourist spending, mainly on catering and hotel services, which again rose sharply this year. Therefore, the harmonised index currently shows a much higher rate of consumer price growth (3.6 percent in October) than the national index (2.2 percent). The gradual convergence of inflation in the euro area to the target level - and the Eurosystem projections announce that the target of 2% annual price increase could be reached in a sustainable manner over the coming year - will allow for a continued gradual decline in key interest rates. Although the direction of the change in interest rates is clear, the intensity of the change is not yet clear. As before, it will reflect a set of indicators on prices, the economic situation and the effects of monetary policy.

The risks to the realisation of these projections are considerably lower than in previous years. Projections are much better at "predicting" economic activity and inflation trajectories than in previous years, and the magnitude of revisions in the new projection rounds is much lower. Risks are also more balanced, meaning that projections are revised on both sides – sometimes upwards and sometimes downwards. However, they are still not negligible and the possibility of significant revisions cannot be excluded if the assumptions on which the projections are based change. The main risk group for growth and inflation refers to the still highly volatile geopolitical situation and uncertainties regarding future economic policies, notably the trade policy of the new US administration and the potential reactions of other major economies. Just because we find ourselves in a "known territory" again on our journey does not mean that we can become careless – it can very easily happen that we find ourselves again in a situation where projections become like "throwing dice in the dark".