Serbia

The economic outlook for Serbia is improving, following a weak performance in 2022-2023 because of the war in Ukraine. Before that, the country had emerged as a sound economic performer in the Emerging Europe region. Average annual real GDP growth increased from just +0.7% in 2010-2014 (compared to a regional average of +3.7%) to +3.2% in 2015-2019 (vs. +2.8%). In 2020, Serbia’s economy was less hit by the global Covid-19 pandemic than most others: real GDP declined by a comparatively modest -0.9% (while the whole region contracted by -2.3%) and rebounded to an expansion of +7.6% in 2021 (vs. +6.8% for the region). However, in the second half of 2022 and the first half of 2023, year-on-year growth dropped to an average of just +1.2% amid the energy crisis and surging inflation in the wake of the war. Growth then rebounded in the second half of 2023 (+3.7% y/y) and first half of 2024 (+4.3% y/y), mainly driven by net trade thanks to moderating import growth, reflecting a lower need for importing energy. Looking ahead, private consumption should recover on the back of lower inflation and strong wage growth, while investment will be boosted by strong FDI inflows. Overall, real GDP growth is forecast to pick up to an average annual +3.5% in 2024-2026.

Inflation pressures will ease but not vanish while currency stability is expected to be maintained in 2024-2025. The monetary policy framework is officially based on inflation targeting but in practice also on a “managed” exchange rate float. The National Bank of Serbia (NBS, the central bank) aims to keep the increase in consumer prices within a 3%±1.5pp band in 2024-2026. However, consumer prices increased beyond the upper band of the target range in September 2021 and eventually rose to a peak of 16.2% in February 2023, mainly because of surging food and energy prices, but also due to some supply-chain and labor-market disruptions. As these effects have gradually faded, inflation decreased to 7.6% at end-2023 and fell back to the upper end of the NBS’s target range in mid-2024. We forecast headline inflation to retreat gradually to around 3.5% by end-2025. The NBS embarked on a monetary tightening cycle late in April 2022. It hiked its key policy interest rate by a cumulative 550bps to 6.50% in July 2023 and has kept it stable until June 2024, when it began a gradual easing cycle in line with the decrease in inflation.

Systemic political risk had gradually improved in Serbia from 2014 to 2022 but experienced a setback at end-2022 as tensions in northern Kosovo rose sharply to dangerous levels. Serious violent conflict has been averted as far as both sides made concessions under substantial international pressure. We expect that the situation between Serbia and Kosovo will remain tense and that a resolution of Kosovo’s status will remain elusive in the next two years at least. The Serbian government is committed to EU integration while maintaining good relations with Russia and China. But the Kosovo issue, Serbia’s close relations with Russia as well as EU concerns over the rule of law are likely to constrain Serbia’s progress towards EU accession.

The business environment in Serbia is slightly below average in our assessment of 185 economies. The Heritage Foundation’s Index of Economic Freedom 2024 survey assigns the country an adequate rank of 60 out of more than 180 countries. However, the World Bank Institute’s annual Worldwide Governance Indicators surveys continue to indicate considerable weaknesses regarding regulatory quality and, in particular, the rule of law and measures to combat corruption. Moreover, our proprietary Environmental Sustainability Index ranks Serbia only 167th out of 210 economies, reflecting serious weaknesses regarding renewable electricity output, water stress and the recycling rate, as well as its exposure to climate events and its readiness to protect itself against such events.