Serbia’s economic growth is proving stronger than expected, but companies may have to finance the next investment cycle at elevated interest rates, creating an unusual combination of accelerating activity and persistently expensive capital.
Erste Bank Research raised its forecast for Serbian GDP growth in 2026 to 3.4% from 2.9%, after stronger first-half data showed the economy performing above earlier government and market assumptions.
Second-quarter GDP growth was revised to 3.8% from an initial 3.6% estimate, taking average first-half expansion to around 3.5%.
Erste maintained its 4.0% growth forecast for 2027, when investment and activity associated with Expo 2027 are expected to provide another stimulus.
The upgrade puts Erste above the IMF’s latest 2.8% forecast for 2026 and reinforces evidence that Serbia has remained relatively resilient despite weak external demand and geopolitical and energy-market pressures.
But stronger growth is unlikely to translate quickly into cheaper borrowing.
Erste expects the National Bank of Serbia to keep its key policy rate at 5.75% throughout both 2026 and 2027, with the first reduction not expected before 2028.
The NBS kept the rate unchanged this week, citing inflation risks and uncertainty in the international environment.
That creates an increasingly important divide between headline inflation and underlying domestic pressures.
Erste cut its forecast for average 2026 inflation to 3.1% from 3.9%, after headline inflation fell sharply during the summer, helped by lower food and fuel prices.
But core inflation remains around 4.5%, near the upper edge of the central bank’s tolerance band.
Services prices remain comparatively strong, while Serbian real wages are still rising by more than 7% year-on-year, among the fastest rates in Central and Eastern Europe.
That combination matters for monetary policy.
Lower headline inflation would normally strengthen the argument for rate cuts. But robust domestic demand, wage growth and sticky services inflation give the NBS less room to ease without risking another acceleration in prices.
Renewed energy-market volatility adds another constraint.
Erste expects headline inflation to move back towards 4.0%-4.5% during the winter as favourable base effects disappear, while higher commodity prices remain an external risk.
Growth without cheap capital
For Serbian companies, the result could be a very different expansion cycle from the low-rate environment that preceded the European inflation shock.
Construction, infrastructure, real estate and domestic investment are supporting growth, while Expo-related projects are expected to provide additional momentum through 2027.
Investment was already one of the increasingly important contributors to Serbian growth during the first half of this year.
But businesses entering that cycle could face a benchmark interest rate of 5.75% for considerably longer than previously expected.
That raises financing costs for machinery, working capital, commercial property and corporate expansion, particularly for SMEs that remain heavily dependent on bank credit.
Large infrastructure and foreign investment projects may be less sensitive because they can access state-backed, international financial institution or external financing.
Domestic private companies have fewer alternatives.
The divergence could therefore reinforce an existing feature of Serbia’s investment model: large state and foreign-backed projects continuing to expand while smaller domestic companies face a substantially higher cost of capital.
Banks are positioned differently.
A prolonged period of higher rates could support lending margins, particularly if economic growth keeps credit demand relatively resilient. But expensive borrowing may eventually restrain corporate investment and household credit growth.
Expo becomes the next test
The stronger forecast also increases the importance of 2027.
Expo-related construction and public investment should provide a sizeable demand impulse, while stronger European growth could improve conditions for Serbia’s manufacturing exporters.
But the combination of fiscal stimulus, rising wages and infrastructure spending could also keep domestic inflation stronger than headline CPI currently suggests.
That is why Erste’s forecast is unusual.
It is not predicting weak growth requiring monetary support. It is effectively predicting the opposite: an economy strong enough that the central bank may not need to provide it.
For investors, banks and Serbian companies, that changes the central question entering 2027.
The issue is no longer simply whether Serbia can return to 4% growth.
It is whether companies can sustain that expansion while financing it with interest rates that remain at 5.75%.
