Is the end of the economic honeymoon waiting for us?

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Since 2015, Serbia has been in a relatively good economic condition. The investment cycle started then for results had decent growth rates in the period from 2018 to today, which were briefly interrupted by the covid pandemic. In those best years, however, we did not experience particularly high growth rates and a good part of this growth was due to certain temporary factors. These factors, such as low energy prices, low interest rates and expansion in the Eurozone, appear to be coming to an end. Domestic problems should certainly be added to that. How much will all these factors together affect our well-being?

Recession in Europe – duration and depth? 

The situation with energy sources as part of the political crisis between the EU and Russia after the Russian invasion of Ukraine will have very clear economic consequences. While most of the attention is currently focused on what austerity measures are being prepared during the upcoming heating season, the economic consequences are currently out of the spotlight.

The German Institute for International Economics in Kiel recently released new projections for the movement of the German economy: they predict significantly lower growth this year and even a recession next year. Recessionary tendencies can also be observed from the movement of the IFO index, which follows the expectations of the German economy: it recorded a value of 88.5 in August, which is an additional slight decrease compared to the big drop in July.

Germany is the largest economy in the Eurozone; its slowdown will have great consequences for other European countries, including Serbia. Particular attention should be paid to those industrial sectors that are involved in international supply chains, such as the automotive industry in our country. This means a decrease in foreign demand, ie. reducing our exports and consequently domestic production. With a bit of luck, and the indicators of the labor market in the Eurozone give some optimism, it will not be a long-lasting or deep recession that can significantly disrupt the economic situation, as was the case a decade ago.

Higher energy prices

From the second half of 2014 until then, the high prices of energy products (oil and gas) fall significantly – the stock exchange price of a barrel of oil from around USD 100 decreases to around USD 50, with an additional plunge during the pandemic of 2020. But since then, oil prices have risen significantly and exceeded the previous found amounts. 

Before the war in Ukraine, a barrel of oil reached the level of about 90 USD, which is the level at which it is still after a short-term price boom due to the political crisis caused by the war in Ukraine and the mutual sanctions of Russia and the West. The price of oil is followed by the price of gas, which skyrocketed during the previous winter due to the energy crisis. 

Even Serbia, which boasts close ties with Russia, had to accept a higher gas price of 360 USD / 1,000 kbm for the first 2.2 billion kbm in the new multi-year contract with Gazprom, and that the rest of the gas (which is almost a third of consumption) procure at stock exchange prices. 

Expensive energy products affect the growth of company costs, primarily in industry, which reduces income from profit tax, but perhaps much more significantly, it can affect the operations of the state-owned company Srbijagas, whose debts the state has already taken over several times during the previous decade. 

Heating plants are especially critical as large gas consumers – they operated without major problems in previous years due to the low price of gas, but now the situation may change: their dividends will no longer be paid to the city budgets, but they will also request payment delays or subsidies that will eventually cover at least part of the state budget.

Higher interest rates

Inflation also means an increase in interest rates. The liquidity in the system caused by the monetary measures of the central banks during the corona (but also a little earlier, since the beginning of the quantitative easing program of the ECB in 2014) has started to decrease as part of the program to reduce inflation, and it is also not worthwhile for investors to borrow funds at low interest, because that way they only lose money, since it loses value with a high rate of inflation. 

This leads to an increase in borrowing costs – it affects the decrease in the profitability of companies, the postponement or abandonment of certain investment projects, which slows down economic growth. The state will also have problems through the lower collection of profit tax, and then through the rising costs of borrowing. On the one hand, the state needs to cover the current deficit, which should amount to around 1.5 billion euros this year, but it also needs to pay off the due principals of previously taken loans, which means borrowing over 3.5 billion euros this year alone. 

Even if we were to eliminate the deficit by some chance, this kind of roll-over of the public debt is expected in the coming years. Therefore, every percentage point increase in interest on government securities means an increase in interest costs of around 50 million euros, not counting those loans with variable interest rates that depend on the Euribor.

Domestic energy crisis

Since the accident never happens on its own, to this list of potential problems from abroad that we could not influence, we should add one important problem that is solely the result of domestic factors. It is of course the destruction of the power sector during the last heating season, from which we have not yet recovered. 

While last year, during that period, we imported about 2,900 GWh of electricity and paid about one billion euros for it (because in addition to electricity we had to pay for gas and gas, which we used to produce at least some electricity in gas power plants), for which EPS and Srbijagas took loans which they will almost certainly not be able to repay, but they will have to fall on the state budget, this year the situation will probably be even worse, Talas writes.