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Serbia’s economic outlook: Growth, inflation and policy challenges in 2023

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In 2023, Serbia’s economy is poised for approximately 3.5% growth, accompanied by nearly 10% annual wage increases, although wage growth will likely stagnate for most of the year. Projected inflation is expected to reach around 3.5% by year-end, with the National Bank of Serbia (NBS) and European Central Bank (ECB) anticipated to continue reducing interest rates, as outlined in the latest Quarterly Monitor.

Milojko Arsić, editor-in-chief of the “Quarterly Monitor” and a professor at the Faculty of Economics in Belgrade, highlighted positive economic indicators in the first quarter. Serbia achieved robust economic growth, particularly in construction and service sectors like IT, telecommunications, trade, traffic and tourism, driven largely by salary increases and domestic demand. Despite a slowdown in export growth due to declining world prices, exports remain crucial for Serbia’s economic growth trajectory.

Employment figures showed a 2.1% increase in total employment and 0.8% in registered employment, attributed to rising labor demand and demographic shifts reducing labor supply. Unemployment stood at 9.6%, relatively low for Serbia but still high compared to European standards.

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Regarding inflation, Arsić noted a shift from food and energy-driven inflation to core inflation influenced by labor costs, fiscal policies, and monetary measures. Serbia’s inflation rate, among the highest in Europe, is expected to decrease gradually, potentially reaching 3.5% by year-end, with an average of 4-4.5% for the year.

The Quarterly Monitor also reported a fiscal deficit of 25 billion dinars in the first four months, equivalent to 0.8% of GDP, indicating a high structural fiscal deficit of around 2% of GDP. Addressing this requires slower growth in major expenditure items relative to GDP or increased taxes, according to Arsić.

Tax revenues, excluding customs duties, saw double-digit real growth driven by higher incomes from wages, pensions, and consumption. Public debt increased slightly to 36.3 billion euros by March’s end, with an expected rise of about 2 billion euros for the year due to recent bond issuances.

Monetary policy adjustments included interest rate reductions by the NBS and ECB, with further cuts expected in response to inflation and economic trends. Bank credit activity towards the population increased, while borrowing abroad expanded for larger enterprises.

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Looking ahead, nominal interest rates on dinar loans are projected to decrease slightly in the second half of the year, with indexed loans expected to follow suit, excluding housing loans.

Arsić concluded with cautious optimism about Serbia’s economic outlook, emphasizing the importance of continued policy adjustments to sustain growth amidst ongoing economic challenges.

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