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Inflation in Serbia reached its peak later, so its decline will lag behind the region

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After the slowdown in 2023, a moderate acceleration of economic growth in the Western Balkans is expected to three percent in 2024, under the conditions of further recovery in the European Union, the main trade partner of this region. Lower inflation should contribute to the growth of disposable income and support consumption, according to the World Bank’s autumn economic report.

However, there are differences between countries in the speed of recovery and return to the levels achieved before the outbreak of the pandemic.

Growth in Montenegro and Albania in 2023 was stronger than expected, which, among other things, was contributed by a successful tourist season, and in 2024 it may partially slow down.

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According to current projections, growth will accelerate in 2024 in Serbia, North Macedonia and Bosnia and Herzegovina, as well as in Kosovo*, under the influence of increased consumption and investments.

“Growth slowed slightly compared to expectations from April, that is, the spring report. The conclusion for the entire region is that the legislation and the atmosphere of market competitiveness must be improved, and especially the sources of energy must be diversified, in light of the crisis that has been affecting the entire continent for two years now”, emphasized Nicola Pontara, director of the World Bank office for Serbia.

According to Lazar Šestović, senior macroeconomist of the World Bank for Serbia, two key economic branches in our country shaped such a result – the construction industry and agriculture.

And while the latter, which is highly dependent on climatic conditions, suffered droughts and floods throughout the season, and in the end achieved more or less the expected results, a decline was felt in the construction industry, primarily due to the rise in the prices of the necessary materials.

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In the second quarter of this year, there was a slight decrease in direct investments and exports compared to the previous quarter, but still at a higher year-on-year level, while there was an acceleration of grow
“Budget consumption this year is very good, while the public debt is at the same or slightly lower level, and the current account deficit of the state will be at the level of around 2.5 percent by the end of the year. When it comes to the year 2022, public revenues have increased, especially based on the collection of corporate income tax, which few expected.

The business results were much higher than the forecasts, and also the collected contributions within the social insurance fund, which nominally increased almost in step with inflation, while at the same time expenditures were reduced, especially those that were reserved for subsidies for recovery of the economy”, analyzed Šestović, and added that the World Bank expects inflation in Serbia to return to the expected NBS corridor in the first half of next year, while it will probably drop to eight percent by the end of 2023.

In Serbia, the peak of inflation was reached later, so it also lags behind other neighboring countries in its decline. That late peak and slower decline led to the effect of dinar appreciation, which can be seen in exchange rate differences during foreign trade.

The conclusions of World Bank experts are that public debt in the country will decrease to the level of 51 percent of GDP, while economic growth will reach 3-4 percent per year until 2026. Also, a strong inflow of direct investments is expected to continue.

As potential risks, Šestović mentioned a possible decrease in demand for Serbian products and services from the markets most affected by the crisis.

Richard Record, the leading economist for the Western Balkans, emphasized that all countries from the Western Balkans region have recovered their growth levels from before the pandemic, but that it has slowed down this year. The energy crisis, higher inflation, as well as the resulting higher financing prices, pose the biggest problems.

In this regard, the prices of financial services continue to rise, but the share of NPLs has not increased dramatically despite external crises.

According to the current estimate of the global poverty line at $6.85 per day per inhabitant, in the entire Western Balkans region, approximately 15 percent of the population is below that line, which is a better situation than before, but certainly not good enough.

On the positive side, the share of the employed population in the total population reached 47.8 percent, which is the highest level since the measurement has existed.

Despite expectations, the labor market in the Western Balkans continued to strengthen in 2023. From mid-2022 to mid-2023, 103,000 new jobs were created, the report emphasized.

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