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Serbia’s GDP growth projected at 3.5% amid drought and expanding fiscal policies

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Professor Milojko Arsić from the Faculty of Economics in Belgrade has reaffirmed his projection that Serbia’s gross domestic product (GDP) will grow by approximately 3.5% by the end of this year. This forecast, which was previously held, reflects concerns over a decline in agricultural production due to drought conditions.

During the presentation of the 77th issue of the Quarterly Monitor of Economic Trends and Policies in Serbia, Arsić noted that year-on-year GDP growth for the second quarter of 2024 was robust at 4%, primarily driven by strong domestic demand, which saw a real growth of 5.5%. However, exports negatively impacted GDP during this period.

Arsić highlighted that the construction and service sectors significantly contributed to growth, while industrial output remained modest. The decline in agricultural production is expected to reduce overall GDP growth by 0.3% to 0.4%. He predicts that growth in the latter half of the year will likely be lower, maintaining the estimate of 3.5% growth for 2024.

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In the first half of the year, both construction and services showed growth, and there is potential for increased industrial performance in the second half. The anticipated launch of an electric vehicle manufacturing facility in Kragujevac, along with the start of tire production at the Linglong factory in Zrenjanin, could positively influence GDP in the fourth quarter.

Inflation trends

Arsić also commented on inflation, which decreased through the second quarter before experiencing a slight rise. This fluctuation cannot be entirely attributed to global market movements or seasonal factors but is influenced by domestic systemic issues, such as wage increases and fiscal policies in Serbia. Although Serbia has made significant strides in reducing inflation since last year, it remains above the midpoint of the target corridor and is higher than rates in many European countries.

Year-on-year inflation in Serbia reached 4.9% in the first eight months of this year, dropping to 4.3% in August. This places Serbia fifth in Europe for inflation rates, surpassed only by Turkey, Belgium, Romania and Iceland.

Arsić emphasized that to stabilize inflation at lower levels, it is essential for income growth to align with productivity and for the fiscal deficit to remain low. He anticipates that inflation could range between 3.7% and 4.1% by year’s end. He noted that the government’s “Best Price” initiative might yield temporary price reductions, though its long-term impact could be limited as producers adjust prices accordingly.

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Fiscal policy adjustments

Discussing the recent budget rebalancing, Arsić described it as a significant shift toward more expansive fiscal policy. He cautioned that a notable increase in the fiscal deficit could accelerate public debt growth in the coming years. Current projections suggest a deficit of 1.5% of GDP for the next year, but actual figures may exceed the planned 2.5%, resulting in increased borrowing.

Arsić pointed out that the timing of this rebalancing is less than ideal, as inflation needs to be further addressed. The anticipated increase in the fiscal deficit, now expected to reach 2.9% of GDP, will stimulate aggregate demand but may hinder efforts to reduce inflation and only temporarily boost economic activity in the following year.

He highlighted that the rebalancing will have long-term implications, with increased expenditures anticipated in areas such as military service, child birth incentives, and a substantial investment plan totaling €18 billion by 2027. Additionally, proposed salary and pension increases in the public sector will contribute to ongoing fiscal pressures.

In terms of monetary policy, Arsić noted that the National Bank of Serbia has lowered the reference interest rate three times since June, from 6.5% to 5.75%. While he deemed these reductions appropriate in light of the new inflation context, he urged caution due to the expansive fiscal policy and rising incomes.

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