RECENT ECONOMIC DEVELOPMENTS
External, one-off factors, such as the disruption of energy production in early 2017 and a drought affecting agriculture, coupled with slow implementation of the Government’s investment program, led to weaker growth in 2017 than was previously projected. Based on preliminary assessments from the national authorities, the economy grew by 1.9% year-on-year (y-o-y) compared to the projected 2.3%. A widening external deficit, increase in imports, and recovery in consumption are driving a shift from a positive to a negative contribution of net exports to growth.
Looking at sectors of the economy, both services and industry performed well in 2017, growing by 2.2 and 3.9%, respectively. The construction sector also started to recover (growing by 1.8% y-o-y) on the back of recent improvements in issuing construction permits and lower financing costs as interest rates fell in 2017. On the other hand, agricultural output is estimated to have fallen by 9.5% compared to 2016 due to drought.
Growth in industry and services contributed to a steadily improved labor market performance in 2017 compared to 2016. The activity rate increased to 54% in 2017, while the employment rate stood at 46.7% compared to 45.2% in 2016, even with unemployment edging up only slightly in the fourth quarter of 2017 to reach 14.7%. Average salaries increased by 3.9% in nominal terms in 2017 compared to 2016, mainly driven by a 4.5% growth in wages in the private sector. The average pension was 2.4% higher than in 2016.
Since employment and labor income play a strong role in influencing the welfare of the poor and vulnerable, poverty (measured as income below the standardized middle-income-country poverty line of US$5.5/day in 2011 purchasing power parity [PPP] terms) is estimated to have declined from 23.8% in 2014 to 23.1% in 2016 and to 22.4% in 2017. The increase in wages and public sector pensions helped household budgets to recover some of the losses from the fiscal consolidation measures. The energy bill discount program for the vulnerable population was expanded in 2017 to mitigate the impact of increases in electricity tariffs as part of fiscal reforms. However, a decline in agricultural output in 2017 is likely to have an adverse impact on rural poverty and slow the pace of poverty reduction overall. Inflation reached 3% by year-end.
The good budget performance continued in 2017, and Serbia ended up with a surplus of 1.1% of GDP. Public debt declined to 62.5% of GDP at year-end compared to 74% at end-2016, in part due to the under-execution of the capital budget.
The current account deficit (CAD) almost doubled in 2017. This resulted in a widening trade deficit, as imports increased by 14.2% y-o-y, driven by higher imports of energy and consumer goods. The growing external deficit continued to be financed by foreign direct investment, which covers 135% of the CAD.
In 2018 and over the medium term, growth is expected to pick up, thus helping with labor market recovery and poverty reduction. Growth is expected to be driven by increased investment, stimulated by reforms to improve the business climate, and by the recovery of consumption (as the fiscal consolidation program gradually expires and private sector wages continue to grow). Growth is projected to be around 3–4% over the medium term.
With economic growth and improvements in the labor market, poverty is expected to continue its gradual decline to around 21% by 2019 (using the US$5.5/day 2011 PPP line). As part of the Government’s fiscal consolidation program, another nominal electricity tariff increase will be considered in 2018, though it will be smaller than previous increases. The recently expanded energy bill discount program can help protect vulnerable customers, but implementation challenges related to claims processing remain.
Last Updated: Apr 20, 2018