Serbia is at risk of high inflation

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The developed part of the world has almost forgotten what inflation is, and Serbia has spent the last seven or eight years in an unusual situation of not having to worry about rising prices.
However, the jump in raw material prices last year with a new energy shock, historically record natural gas prices and huge increases in electricity prices, as well as rising oil prices reminded not only of inflation, but also of another almost forgotten economic term – stagflation. It is a situation in which prices are rising and the economy is stagnating or even falling. The director of the International Monetary Fund, Kristalina Georgijeva, announced a few days ago that this institution will reduce the forecast of global economic growth, but how much will be known today, considering that the annual meeting of the IMF and the World Bank is being held.
In Serbia, fortunately, at least until the New Year, we do not have to worry about gas prices, considering that the long-term supply contract with the Russian Federation lasts until the end of the year, and its extension or a new contract is currently being negotiated.
For now, we get gas at an extremely cheap 260 dollars for 1,000 cubic meters, compared to stock market prices that reached an incredible 1,900 dollars for 1,000 cubic meters. However, considering that the price of oil has doubled to 80 dollars per barrel since last year, and the prices of gas in supply contracts depend on the price of oil, it would not be surprising if there is more expensive gas from the New Year. In the meantime, the price of electricity has also become more expensive for the economy, so the companies whose previous contract expired this summer received a twice as expensive offer from the supplier, primarily EPS, which holds over 95% of the market. So, although households are not under attack for now, the economy is very much under attack, and according to economists, that means a blow to the country’s economic growth next year.
A few days ago, the President of Serbia, Aleksandar Vucic, announced what could happen to us when he said that the owners of one cement plant announced a 25 percent increase in the price of cement if the price of electricity is so high.
Milojko Arsic, a professor at the Faculty of Economics in Belgrade, says that the growth of energy prices at the macro level primarily affects the growth of imports, since we are importers of energy, and also the growth of inflation.
“For companies, that means rising costs and falling profits. Since energy is used in almost every production and in households, it also means an increase in general prices. All in all, this is reflected in the slowdown in economic growth, not only ours but also the world’s. How much growth reduction could be is hard to say. It depends on how long this gas crisis will last. As the price of gas jumped sharply and extremely, it can fall sharply, especially since there are geopolitical causes, such as North Stream 2. The most severely affected by the rise in energy prices would be, explains Arsic, industries such as Zelezara, which uses a lot of electricity. then RTB Bor, ie today Zijin for the same reason, although in the previous year, two enjoyed record prices of copper. There are also cement plants, and then fertilizer producers whose inputs are oil and gas.
Ljubodrag Savic, professor of Industrial Economics at the Faculty of Economics in Belgrade, estimated that this crisis will mostly affect companies whose energy sources are not only energy but also raw materials such as oil and gas complex, but also that in the short term “most companies can handle”.
“The problem is if such high energy prices last longer or if they become even more expensive, because that could be the beginning of a negative spiral. The first blow is covered from reserves, but further companies will have to increase the prices of products, but then comes the psychological moment, so they do not increase the price of fuel, but also to protect themselves from further increases. When everyone does that, then we come to high inflation. So, in the short run, these high energy prices do not necessarily mean an economic slowdown, but in the long run it certainly does,” Savic said, adding that inflation is thinning everyone’s wallets, which again reduces the population’s demand for goods, which then further reduces production.
“It is a scenario that I do not believe in and I would not like it to happen, but it can affect not only us but the whole world. And if something like that happens in Europe, it will spill over in our country as well,” warns Savic, noting that it is not only a problem that GDP growth is slowing down, but also that indicators such as the ratio of public debt to GDP and difficult servicing of obligations are deteriorating.
Inflation goes above the target of 4.5 percent
A few days ago, the World Bank raised the forecast of Serbia’s GDP growth to six percent this year, while the estimates of our institutions are even more optimistic and amount to 6.5, and even seven percent, although not in official documents but in statements. The World Bank forecasts 4.5 percent growth for next year, but international financial institutions have not yet released forecasts or estimates that would take into account this latest energy shock. Year-on-year inflation reached 4.3 percent in August (the latest data), which is the highest year-on-year inflation since 2013 and is very close to the upper limit of the NBS target corridor of 4.5 percent. According to the latest announcement of the NBS, it is expected that inflation will go above the target, ie the limit of 4.5 percent, but that a return to the target framework is expected in the second half of the year, Danas reports.