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Economic policy update: Understanding the temporary halt in housing construction

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Construction, a vital economic sector, significantly contributes to a country’s GDP by adding value through various projects. Historically, construction’s share of GDP has ranged from 3-5% in developing countries and up to 7% in developed ones. Experts argue that for sustainable economic growth, the construction sector should constitute at least 5% of GDP. In Serbia, construction contributed approximately 5.5% to GDP last year, reflecting its importance in driving economic activity.

However, the impact of the construction sector on economic growth is not limitless and evolves with the maturity of the economy. Studies show that there’s a developmental threshold beyond which the marginal contribution of construction investment declines. In developing countries, the focus is often on new construction projects, while in developed economies, it shifts towards renovation and infrastructure upgrades.

Policy makers are advised to prioritize building domestic construction capacities to stimulate economic growth effectively. This includes creating an institutional environment conducive to construction activities, implementing fiscal policies that support infrastructure development and public works, and ensuring monetary policies that maintain optimal liquidity without overheating demand. These tasks are complex and often face challenges due to the economic cycle’s phase.

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Construction projects also have a significant multiplier effect on related industries such as manufacturing of construction materials and mining. This stimulates employment and boosts economic activity further. Therefore, it’s essential to consider this broader impact when assessing the value of construction activities.

The value of completed construction works and working hours on construction sites are key indicators used to monitor construction activity. After a decline in 2022 and early 2023, the construction sector in Serbia showed signs of recovery, primarily driven by large infrastructure projects such as highways and railways.

However, there are concerns about the slowdown in housing construction. Factors such as market instability post-COVID-19 and geopolitical tensions have impacted the construction materials market, leading to a decline in imports of products essential for housing construction. Real estate transactions and the purchase of apartments have also decreased, indicating a weakening demand for housing.

Despite efforts to stimulate demand through monetary policies and interest rate adjustments, the contraction in demand for housing remains a challenge. While there are some positive signs of improvement in housing construction activity, it’s premature to conclude whether this trend will continue for the entire year.

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In conclusion, understanding the dynamics of housing construction and its impact on the broader economy is essential for crafting effective economic policies. Addressing challenges in the housing sector requires a multifaceted approach that balances supply-side interventions with measures to stimulate demand and ensure sustainable economic growth.

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