The biggest reason for the decline in the total profitability of the domestic economy in the previous year is the decline in operating profit. Although business profitability has grown in most of the observed sectors, among which construction is the leading driver of economic growth in the whole of Serbia, the minority in which a decline has been recorded has a significant impact on overall business results.
The domestic economy recorded a slight decline in profitability in the previous year compared to the year before, which interrupted the positive trend present since 2014. The decline in total profitability is primarily due to the decline in business profitability, which in 2019 amounted to 5%, which is less by 0.58% compared to the previous year. This is, at the same time, the lowest rate of operating profit since 2015.
This could be a warning signal, according to the latest analysis of the Foundation for the Development of Economic Science (FREN) on the profitability of the Serbian economy in 2019. Authors Jovana Jugovic, Maja Ribic and Milutin Zivanovic add that, nevertheless, it should be borne in mind that similar negative trends are present in the economies of the USA and Western Europe.
Although the analysis of selected sectors shows that the majority achieved an increase in operating profit, the minority that recorded a decline has a greater impact on the results of the overall economy.
The growth of business profitability was achieved by the sectors of agriculture, mining, construction, wholesale and retail trade, information and communication, accommodation and food, and administrative and service activities. The decline in the rate of operating profit was recorded in the activities of manufacturing, electricity supply, water supply, transport and storage, and in the sector of professional and scientific activities.
Climate change is slowing down the development of agriculture
Last year, agriculture recorded an increase in business profitability by 0.4%, which is a good sign since this industry had a decline in operating profit from 2016 to 2018. However, this is not a particular reason for long-term optimism because this activity, due to insufficient modernization, is very susceptible to changing climatic conditions.
Last year, they caused a drop in production volume by 0.1%, which affected the growth of producer prices, which were higher by 0.6% compared to the previous year. The decline in agricultural production will continue in the coming years if appropriate agro-technical measures are not applied, which will increase the quality and fertility of the land, the analysis warns.
After the decline in 2018, the growth of the operating profit rate was also achieved by the mining sector, which shows that there was an improvement in the core business in the sector. Since the privatization process of RTB Bor was completed last year, it probably affected the growth of the entire industry in 2019, and it is to be expected that with the announced new investments, the situation in this sector will further improve.
There has also been slight progress in the trade sector, where after falling in 2018, operating profit increased in 2019 as a result of faster growth in operating revenues relative to operating expenses. This was certainly contributed by an increase in turnover in wholesale trade by 5.63%, as well as an increase in turnover in retail trade of 11.33% in current prices.
Construction encourages others
A significant increase in the operating profit rate was achieved by the construction sector. The rate of business profit in this activity continued the positive trend from previous years and increased by 1.2% compared to 2018. This industry was the driver of economic growth in Serbia, as in 2018, when, according to the SBS, it was recognized as the sector with the highest real growth in gross value added.
Good results in the last few years have contributed to an increase in the share of construction in Serbia’s GDP from 3.2% in 2014 to 5% in 2019. The success of this sector is reflected in the growth of the number of employees, the number of issued building permits, as well as the value of construction work performed. High growth rates of construction enabled fast realization and completion of large infrastructure projects, but also intensive investments in building construction.
There was a slight improvement, after the deterioration of the business result of the previous year, in the information and communication sector. The growth of business profit would be even higher, the authors of the analysis state, if, in parallel with the growth of physical volume, there was no slight drop in prices in the telecommunications sector. In addition, the use of the Internet continues to grow at the expense of traditional telephone traffic, which makes it difficult for telecommunications companies to manage profitability. Although part of the data transfer for communication is done via the mobile internet, most of the earnings from online services go to companies whose applications are used.
In the accommodation and food services sector, the improvement in the operating profit rate was caused by an increase in the number of tourist nights, as well as an increase in the prices of catering services by 1.6% compared to the previous year, which led to an increase in operating income. In the sector of administrative and service activities, the operating profit rate increased significantly, which further improved the positive trend from the previous year. Growth in this sector is particularly significant given that the activities that make it up are supporting activities of the economy, which points to the growth of industries that use these services.
The most important sectors had a drop before the corona
Among the activities that recorded a decline in operating profit, the manufacturing industry is the sector with the most significant share in the country’s GDP, while the share of the electricity supply sector is among the most significant. For that reason, it is not good for the economy that these two important industries have been showing a declining trend since the beginning of the observed period (2016).
In the manufacturing industry, a decrease of 0.9% was recorded because operating revenues grew at a rate of 4.80% compared to operating expenses, which increased by 5.84%, which led to a decrease in operating profit compared to 2018. The growth of wage costs, electricity prices and the growth of prices of agricultural products contributed to the faster growth of operating expenses in the manufacturing industry, which had a negative impact on business profitability.
The production of the processing industry dropped significantly in the first half of 2019, which was caused by the overhaul of the Pancevo Refinery and Petrohemija, as well as the reduction of production in Fiat. However, in relation to 2018, according to the SBS data, the production of the manufacturing industry grew by 0.2%. The small growth is a consequence of the decline in the production of petroleum products, the chemical and food industry, the production of motor vehicles and trailers.
Problematic electricity and water prices
The decline in the rate of operating profit in the electricity supply sector was due to faster growth of operating expenses relative to operating revenues, which is probably caused by the weaker profitability of EPS, which is the dominant part of this sector. It is interesting that the business performance of the sector decreased, although at the end of 2018, the price of electricity for commercial use in 2019 increased significantly (20.2%). Such an increase cannot be justified by the growth of the price of electricity on the market, so the reason should probably be sought in the insufficiently high price of electricity for citizens, which is below the cost of production and as such unsustainable, the analysis estimates.
A significant decrease in the rate of business profit by 10% compared to 2018 was recorded by the transport and storage sector, primarily due to the decline in operating revenues and partly due to lower prices of transport and passenger transport services. The drop in operating profit by 0.3% in the water supply sector is not a surprise given the too low water prices as well as the large losses in the system (35% of the total repressed water is not invoiced). The request to increase the price of water was not approved, but in October 2019, the fee for the operational readiness of the water supply system was adopted. The fee is calculated in a fixed amount of one euro per account and will represent additional income that will eventually enable better business results.
The sector of professional and scientific activities recorded a decline in the operating profit rate of 2.2%, largely due to the growth of expenditures, which were mostly influenced by the growth of costs of wages and production services.
