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Serbia, The first signs of a slowdown in the Serbian economy

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Although in the second quarter of this year the economy of Serbia continued to grow solidly, the first signs of slowing down can already be read. This is happening because all the factors that determine global and European economic trends – growing geopolitical risks, high accelerating inflation, as well as the tightening of monetary policy, practically shape the movement of our country’s economy, says Saša Ranđelović, professor at the University of Belgrade’s Faculty of Economics.

In an interview with, he talks about the interdependence of the Serbian economy and global events, the effects of monetary policy on the economy, the further trend of inflation and the impact of the energy crisis during the coming winter on economic results in the coming period. We also discussed with Professor Ranđelović the possible steps taken by the state to help and protect domestic businessmen, as well as why indiscriminate assistance to all citizens is currently not the best option.

How would you assess the current state of the domestic and global economy, taking into account the entire set of circumstances at the world level?

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– Regarding the global economy, the revised estimates of international financial institutions indicate that the growth rate in 2022 will be lower than initially planned. The IMF estimated the growth of the global economy at some 3.2 percent in 2022, with an additional slowdown expected in 2023. The trend of economic activity in European countries is particularly relevant for us, considering that about two-thirds of domestic exports go to European countries and that almost two-thirds of foreign direct investments come from those countries. Estimates for European economies are similar to those for the global economy – economic growth has slowed down since the second quarter and is expected to be lower than initially planned, while for the next year it is estimated that some European countries will enter recession, i.e. that have a real decline in the economy.

For example, the growth rate for the next year is estimated at 0.5 percent for the countries of the Eurozone, and there are great risks that the Eurozone will enter a recession. This is the result of several factors: since last year, there has been a negative impact due to problems with supply chains caused by the pandemic, which affected both economic activity and the beginning of inflation growth already in the middle of last year in a number of European countries, and this year it will be added to that several more broader problems, primarily those related to the war in Ukraine. This left negative consequences on the prices of energy and food, and thus negatively affected the general economic trends, contributing at the same time to the growth of inflation. It coincided with the third group of factors, namely the tightening of monetary policy by the big central banks (Fed, ECB, Bank of England) with the aim of stopping the growth of inflation, which in all these countries has grown strongly this year. The tightening of monetary policy leads to an increase in interest rates, which has a disincentive effect on investments and consumption.

Two years ago, when the health crisis began, you stated that the recovery of Serbia’s economy would depend, among other things, on the speed of recovery of our largest economic partners, primarily in the European Union and the Western Balkans. What is your opinion now, when the health crisis is not even over, and completely new aggravating circumstances are happening in the world?

– All the factors that determined the global and European trends in the economy practically shape the trends in the economy of Serbia. Growing geopolitical risks, i.e. problems on the energy and food markets, as well as in supply chains, then high inflation, which devalues ​​real incomes and thus reduces the real purchasing power of the population and the economy, and the tightening of monetary policy, which leads to a general increase in interest rates, represent factors that dominantly shape economic trends in Serbia. In addition, the development of the Serbian economy this year was additionally significantly affected by the problems of electricity production and the need for large imports of energy sources, all of which negatively contribute to the growth of the economy. An additional aggravating circumstance is the drought that has affected some segments of agricultural production.

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In the second quarter, the economy of Serbia continued its solid growth of 3.9 percent compared to the same period last year, while seasonally adjusted growth compared to the first quarter amounted to 1.2 percent. Accordingly, growth in Serbia in the first half of the year was solid, although slower than the average of the countries of Central and Eastern Europe. However, there are also signs of a more significant slowdown in the middle of the year, which we can see in the segment of industrial production and construction. The decline in industrial production is primarily the result of a drop in demand, primarily in European markets, while the decline in the construction sector was influenced by the rise in prices of energy and raw materials, as well as the rise in interest rates, which is already felt on world markets.

The Serbian economy is largely oriented towards the countries of the European Union and the region. How will the developments in these markets affect the direction of our development?

– Bearing in mind how much of Serbia’s exports go to the countries of the European Union, primarily Germany, Austria and Italy, as well as the fact that a significant part of exports goes to the countries of the region – Bosnia and Herzegovina, North Macedonia, Montenegro and Croatia, the slowdown in economic activity on that markets, i.e. the decline in demand, will inevitably affect our exports as well.

On the other hand, when looking at investment flows, foreign direct investments from European countries account for about two-thirds of total foreign direct investments in the Serbian economy. They would probably fall autonomously due to the rise in interest rates, i.e. the tightening of monetary policy, but an additional deepening of the crisis – geopolitical risks, political issues that arise in the relations between Serbia and European countries, can further deepen this decline. In the first seven months of 2022, foreign direct investments in Serbia amounted to around 1.9 billion euros, which is nine percent less compared to the same period last year, but still represents a solid result. With the passage of time, the negative effects of rising interest rates and geopolitical risks will probably become more visible in the capital inflow segment as well.

After a long time, the National Bank of Serbia started increasing the reference interest rate in April, for seven months in a row. Experts claim that further growth of the key interest rate can be expected. How do these developments affect the economy and what do you expect in the coming months? How much will the monetary policy of central banks such as the ECB and the Fed affect business conditions in Serbia?

– It will be reflected, first of all, through the growth of interest rates on loans to the economy, the population and the state, which we also see on the world market. Due to the raising of reference interest rates by central banks, the National Bank of Serbia (NBS) has raised the reference interest rate on several occasions. The ECB started raising interest rates in the middle of the year, and the US Fed even earlier, so the rise in interest rates will certainly lead to a drop in global investments, i.e. to a drop in capital flows.

At higher interest rates, some investment projects cease to be profitable. This could have a negative impact on the inflow of capital, that is, the inflow of foreign direct investments in Serbia. Whether there will be an additional slowdown on political grounds remains to be seen.

How much has inflation affected the business of domestic businessmen and how much do you estimate that it could continue to affect?

– The acceleration of inflation in Europe, including in our country, happened at the end of last year. At the time, price increases were fueled by supply chain problems caused by the pandemic, but there still appear to be multiple factors leading to a large number of countries seeing inflation rise strongly in the previous period. One set of factors relates to the aforementioned supply chain issues, but that has largely been resolved now. The second group refers to geopolitical risks, i.e. strong growth in food and energy prices caused by the global crisis. The third group of factors consists of factors on the demand side. The strong monetary expansion in the US and Europe over the past 13 years has influenced the decline in interest rates, which has led to strong growth in credit activity, consumption and investment. On the other hand, during the pandemic period, most countries implemented large fiscal stimulus packages.

Inflation in general, including in our country, has a negative effect on the growth of the economy, because it leads to an increase in uncertainty and a drop in real incomes, which has a negative impact on investments and consumption.

When do you expect price and market stabilization?

– If there was no greater escalation of geopolitical risks, i.e. greater price changes on the energy and food market, it could happen that inflation in Serbia reaches its peak sometime around the new year and then begins to decline. This could happen, among other things, because we will have a high base effect next year. At the beginning of this year, we already had a noticeable increase in inflation, so at the beginning of next January, we will compare ourselves with prices that have already started to rise. If, on the other hand, there are further disturbances in the energy and food markets and a strong increase in prices on the global markets, then perhaps the slowdown in inflation will also occur later. In any case, we can expect that inflation will be around 15 percent this year as well, and it will certainly not return to the target corridor next year, but will still be relatively high.

The energy crisis is shaking the whole of Europe, during the coming winter there is expected to be a shortage of gas, oil, electricity… How much would possible electricity restrictions and the lack of certain energy sources affect the Serbian economy?

– That factor, in connection with winter and the energy crisis, will certainly manifest itself in some way. If there are particularly large restrictions, companies will not be able to operate properly. This will affect the production and movement of economic activity. On the other hand, if this does not happen, it is certain that it will be necessary to import electricity in larger quantities, which will again affect the growth of the economy, because the growth of imports has a negative effect on the overall growth of GDP.

– The problem is that we are in conditions of stagflation, i.e. slow economic growth and high inflation. In that situation, any measure that you implement from the fiscal and monetary sphere will have a positive effect on one aspect and a negative effect on the other. Therefore, if the country were to go into monetary and fiscal expansion, it would contribute to the further growth of inflation, and perhaps it would partially slow down the negative effect on economic activity. On the other hand, if the tightening of monetary policy continues, it would lead to a gradual reduction of inflation, but would deepen negative pressures on economic activity. Probably, in the conditions of such a specific crisis as this one, it is justified to treat the more urgent problem first, namely inflation. This means that it would probably be justified to continue tightening monetary policy, i.e. increasing restrictiveness, and that the fiscal deficit should be reduced more significantly and the pressure from the fiscal side on demand and price growth should be reduced. On the other hand, the sustainable fiscal framework should also include targeted support programs for citizens and the economy that are most affected by the increase in food and energy prices, Biznis writes.

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