Quarterly Monitor number 71

The authors of the latest Quarterly Monitor, published by the Faculty of Economics in Belgrade and FREN, have identified several negative trends in the Serbian economy in late 2022 and early 2023. The economic activity is slowing down, inflation is rising, employment is stagnating, real wages are decreasing, and external deficits, though decreased, remain high. The highest macroeconomic challenge is the high and still growing inflation, which reached 15.1% at the end of 2022 and 16.1% in February 2023. The country’s current account balance has noticeably worsened throughout 2022, with the current deficit increasing from 4.2% of GDP in 2021 to 6.9% of GDP, but it has decreased in the second half of the year. The primary trends in the labor market at the end of 2022 were the stagnation of employment and unemployment, with the average real wage dropping due to accelerated inflation. Although the fiscal movements can be generally considered stable, the country had a relatively high budget deficit of 3.1% of GDP in 2022.

Regarding global economic movements, there is turbulence, and forecasts are being revised month-to-month. Inflation is decreasing slower than expected, so central banks continue to apply restrictive monetary policies. Besides the unpredictable geopolitical risks that significantly affect the economy, the banks in the US and Switzerland faced a crisis in March. The strong reaction of central banks and governments in those countries has so far prevented panic from spreading, but the appearance of a more severe crisis in the banking sector cannot be excluded. An eventual banking crisis would almost certainly further lower GDP, prompting central banks to ease monetary policy through significant liquidity loan emissions, possibly stopping or even reducing interest rates in such circumstances.

Serbia achieved a relatively modest economic growth of 2.3% in 2023, which was lower than that of CEE countries and the EU as a whole, mainly due to its earlier recovery from the pandemic crisis and the poor agricultural season. The economic activity has significantly slowed down within the previous year, with a mere 0.4% YoY GDP growth in the last quarter of 2022. The acceleration of inflation has had a negative impact on the real income of the population, reducing private consumption, as have the rising interest rates, which decrease investments and private consumption. Serbia’s economy is adversely affected by the slowing of economic activity in the EU, as well as the deterioration of the geopolitical situation. Given the current trends and existing risks, the growth of Serbia’s GDP in 2023 is estimated to be around 2%. The country had a relatively high budget deficit of 3.1% of GDP in 2022, which was slightly higher than that of comparable CEE countries and the EU as a whole. However, out of the 3.1% of GDP deficit, 2.7% of GDP were budget expenses to cover Srbijagas and EPS losses. The high fiscal deficit in 2022 is mainly due to extraordinary state expenditures, which means that the structural (systemic) deficit is low. Therefore, Serbia has the opportunity to significantly reduce the fiscal deficit in 2023, compared to the planned 3.3% of GDP. A lower budget deficit would lead to a faster reduction in the share of public debt in GDP, thus reducing interest costs, which would otherwise increase due to rising interest rates. Another reason why a fiscal deficit reduction should be pursued in 2023 is that such a fiscal policy would contribute to lowering inflation. The third reason for a more restrictive fiscal policy is the numerous uncertainties, primarily in the international environment, which could require new and unplanned state interventions – a smaller fiscal deficit would create space for such interventions.

The National Bank of Serbia (NBS) continued to implement a restrictive monetary policy during last year and in the first quarter of this year, through an increase in the reference interest rate and the withdrawal of liquidity through REPO operations. Given that inflation is still high, it is justified to continue with the implementation of a restrictive monetary policy during this year. The effectiveness of monetary policy in reducing inflation will be greater if it is supported by a low budget deficit. Lowering inflation in Serbia will be faster if inflation continues to decline in the EU and if there is no rise in energy, food, and metal prices. Quick inflation reduction is important to prevent a spiral between inflation and wages, as well as the embedding of high inflation in the expectations of businessmen and citizens.