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Drought and expensive energy are holding back economic growth

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Despite the difficulties, economists expect GDP growth of around three percent

How the Serbian economy “held up” in the second quarter is not yet known to the public, and it will be known on the last day of August when statistical data will be published. For now, he is dealing with a flash estimate of an increase of around four percent, with the already confirmed economic growth from the first quarter of 4.4 percent. These are undoubtedly good results, but the problem is that it is expected to worsen in the second part of the year, not only here, but more or less in all countries. Economists widely predict a cooling of economic activity. Therefore, it is not out of place to look at how others see us.

For example, the largest Austrian bank Erste, which operates both here and in the region, recently forecast economic growth of only 2.5 percent for the entire year, and this is the lowest estimate that any international financial institution has made so far. They also predict an increase in the deficit to 4.5 percent of GDP. As a reminder, the budget was prepared based on a four percent growth forecast and with a three percent deficit. The World Bank’s June estimate is that our GDP will grow by 3.2 percent this year, and only 2.7 percent next year. Economists warn that the World Bank’s forecast was made on the basis of March data, which were significantly better.

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Milojko Arsić, a professor at the Faculty of Economics in Belgrade, stands by the assessment made in the Quarterly Monitor in June that GDP growth in 2022 will be around three percent.

“What is bringing down economic growth this year is a worse agricultural season than expected.” There is a lot of uncertainty as to whether there will be enough gas and electricity shortages, and this could drastically reduce GDP in the last quarter. Many factors are beyond the government’s control such as world market prices, supply of products. The growth of interest rates has a negative effect on construction, investments are reduced. An indicator of this is the drop in the prices of metals used in construction”, says Arsić.

As for the deficit in the state coffers, the state can manage it and when and how much debt it will take over, especially from EPS. The deficit for the first six months is relatively small, because inflation brings large revenues, and a large part of expenditures did not increase. Salaries in the public sector and pensions make up half of the state’s expenditures, and they are still standing.

“The deficit will definitely be higher by the end of the year, and it will be 4.5 percent of GDP only if the state takes over a significant amount of some debts”. I am referring to EPS debts and guarantees to Srbijagas. When the state takes over their obligations, then they become part of the deficit”, notes Arsić.

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Mihailo Gajić, program director of the research unit of the Libertarian Club (Libeka) expects a slight slowdown in economic growth due to price disturbances, problems with transportation, because it cannot cross the Danube, which affects imports and exports, and high energy prices, which will all affect industrial production.

“A big problem for us is the business of state-owned energy companies EPS and Srbijagas.” Last heating season, we imported electricity for about 3,000 gigawatt-hours at a price of 200 to 300 euros per megawatt-hour. That electricity is sold to businesses for around 75 euros and to households for 45 euros. The difference must be compensated by EPS. Energy companies made a loss of one billion euros last year, which is not yet visible in the company’s balance sheets. We now have more consumption than electricity production, and the question arises where the money to cover the losses will come from. The state is not enthusiastic about putting it in the deficit, because it sends a signal to investors that something is wrong with public finances. That is why I now expect a little accounting game so that their losses do not enter the deficit, and this will probably be done by providing guarantees for the loans that these companies take.

Goran Radosavljević, professor at the Faculty of Economics, Finance and Administration expects the economy to grow by up to three percent. As for the deficit, he believes that the deficit will not be as large as Erste Bank forecasts, for the simple reason that high inflation fills the budget. Apart from that, we are not an export-oriented economy, so we cannot be affected much by the drop in global demand, which was also seen during the corona virus, Politika writes.

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