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Assessing Economic Activity: A Comprehensive Evaluation

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The expressed geopolitical tensions and the overall economic downturn in the Eurozone had a limited impact on slowing economic activity in Serbia during the summer. On the contrary, there was an accelerated growth in industrial production in July, particularly in August and September, unexpectedly revitalizing the manufacturing sector. Statistically observed, the overall contribution of the industry to the real year-on-year GDP growth of around 3.5% in the third quarter equaled the contributions of agriculture and construction combined. Lower global demand contributed to the continued reduction in dynamics in foreign trade, with September marking the first instance, since the escalation of the pandemic, of a decline in merchandise imports followed by a reduction in merchandise exports.

The year-on-year decline in the value of foreign trade in euros has been recorded for the sixth consecutive month. For the first nine months of this year, approximately four-fifths of merchandise imports were covered by exports. Under the influence of lower imports, the balance of payments position improves, foreign exchange reserves grow, but VAT-related budget revenues decline. The slowdown in inflation has positive effects on the year-on-year calculation of real wages, which have been increasing since June, while the trend of rising real retail turnover is on an upward trajectory after a twelve-month decline.

Industrial production recorded a year-on-year growth of 3.0% in September, maintaining a relatively high cumulative year-on-year increase of 2.4% for the January-September period. For the second consecutive month, following August, year-on-year growth has been observed in all three production sectors: the Mining and Quarrying sectors, as well as the Supply of Electricity, Gas, Steam, and Air Conditioning increased by 1.1% and 3.9%, respectively, while the Manufacturing sector recorded a growth of 3.0%. In September, for the first time this year, the largest contribution to the year-on-year increase in industrial production came from the manufacturing sector (2.3 percentage points).

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This confirms the recovery of the manufacturing sector, which has been evident since the beginning of the summer. The manufacturing sector accounted for 26.5% of the total industrial growth in July, 30.8% in August, and almost four-fifths (78.0%) in total industrial growth during September. This is good news considering that the Mining sector has been trending slightly below last year’s average this year, while clear signs of stagnation and decline are evident in the Production of Electricity.

Cumulatively, in the first nine months of this year, the year-on-year growth of total industrial production has been mostly contributed to by the production of electricity, while the contribution of the Mining sector is considerably more modest. Despite the described revival of production during the summer, the cumulative contribution of the Manufacturing sector for the first nine months of this year remains negative.

The revival of the manufacturing industry during the summer, coupled with the previously recorded strong performance of the Mining and Electricity sectors, restores the dynamics of overall industrial production to the long-term trend that began in the middle of the last decade. In the circumstances of a pronounced economic downturn in the eurozone, this fact is a curiosity and another confirmation of the resilience of the domestic economy.

Nevertheless, we assess that this result is temporary. It simply is not realistic for such a strong upward trend in industrial growth to be sustained in the existing environment in the long term.

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Movements within the Manufacturing sector indicate that there is no stable trend, and monthly jumps are mostly of an incidental and unpredictable nature.

Unlike August, when almost the entire growth of the manufacturing sector came from the Production of basic pharmaceutical products and preparations and the Manufacture of chemicals and chemical products, in September, the sector with simultaneously the highest weight woke up. This is the Production of food products, which increased by 13.7% year-on-year. Worth mentioning is also the Production of basic metals, whose activity over the past five months returned to the level of 2021 (i.e., before the onset of the war in Ukraine).

In September, but also cumulatively for the first nine months of this year, the following sectors of the Manufacturing sector are facing the greatest challenges: Manufacture of fabricated metal products, except machinery, and Manufacture of coke and refined petroleum products. They are followed by Manufacture of paper and paper products, Manufacture of rubber and plastic products, and Manufacture of chemicals and chemical products.

The movement of the overall industry, by purpose groups, in September year-on-year shows an increase in the production of Non-durable consumer goods by 10.2% and Energy by 1.6%, while a decline was observed in the production of Durable consumer goods by 3.4%, Capital goods by 1.7%, and Intermediate goods, excluding energy, by 0.3%. The entire story regarding the manufacturing industry still boils down to the war in Ukraine and sanctions against Russia, which led to increased energy prices and reduced economic activity in the EU, affecting its foreign trade activity. However, current price relations are more favorable than at the end of last year and the beginning of this year.

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