ASerbia’s economy will slow down in 2014 in the aftermath of the spring 2013 floods as well as the government austerity measures. Domestic demand is constrained by the process of fiscal consolidation. Perennially high levels of unemployment along with a cutback in lending to consumers undermine demand. The private business sector is starved of bank credit while an inefficient state-owned sector is in urgent need of restructuring. The potential rate of growth is about 3.0%. Serbia's economy slipped into recession in 2009 when exports fell at a double-digit pace and industrial production declined. In response, the government introduced an emergency spending programme valued at 3.0 billion euro to stimulate production and exports. Moderate growth returned in 2010 and 2011 but Serbia returned to recession in 2012 owing to poor climatic conditions, closure of a major steel plant and weakness in the euro area. Another rebound was reported in 2013 when real GDP grew by 2.5%.
The transition from a pattern of consumption-led growth to an export-driven form of growth has proved to be exceptionally difficult. Smaller firms are going through a particularly troublesome adjustment, and employment in both formal and informal segments of the private sector has contracted. Many essential reforms have been delayed until 2014. The level of economic activity remains below the pre-crisis level owing to structural rigidities.
Serbia's real GDP is forecast to grow by 2.1% in 2014 – down from 2.5% in 2013. Recent flooding, as well as austerity measures, slow down the economy. Domestic demand also remains subdued. The economy grew by a disappointing 0.4% in the first quarter of 2014 compared with a year earlier.
Prices rose by 7.9% in 2013 and inflation of 3.2% is expected in 2014. The central bank's target range for inflation is 2.5-5.5%. The central bank lowered borrowing costs in May
2014 in a bid to help the sluggish economy.
Domestic demand is constrained by the process of fiscal consolidation. Perennially high levels of unemployment along with a cutback in lending to consumers also undermine demand. The real value of private final consumption fell by 4.5% in 2013 and an increase of 1.9% is expected in 2014.
The launch of the EU accession negotiations and increased membership prospects should produce a rise in investment activity, albeit from a very low level.
Unemployment was 22.1% in 2013 and that will not change in 2014. Approximately half of all young adults are unemployed. Serbia's rate of employment (the percentage of people of working age actually working) is only about 45%. This is about 20% lower than the EU average. Amendments to the labour law make it easier to fire workers.
Evaluation of market potential
The transition from consumption-led growth to a greater reliance on exports is finally beginning to produce some results. The potential rate of growth is about 3.0%.
In the medium term, rates of growth should approach this benchmark as investment picks up. Improving prospects for the EU accession and the hope of additional reforms should help to boost rates of growth over the next several years. Inflows of FDI are expected to rise gradually in the medium term while macroeconomic imbalances will be reduced.
Agribusinesses have considerable potential as recovery in the EU begins to take hold. The elimination of waiting times at borders would make it possible for producers to shift from low-profit frozen exports to fresh exports. In addition, the growing season is unique and fits comfortably with the EU's needs.
The share of exports in GDP has been rising for several years and amounted to 34.4% of GDP in 2013, up from 23% in 2008. Exports (in dollars) rose by 30.1% in 2013 and gains of 22.5% are expected in 2014. Growth is driven by expanding car and oil product exports.
The EU is Serbia's main trading partner. In 2013, it accounted for 61.7% of all exports. The EU has agreed to a trade agreement as the reward for improved cooperation with Belgrade. Serbia also has a free-trade agreement with Russia, which allows Serbianmade products easy access to a large market. Serbia's exports of military arms have been rising quickly since the industry was rebuilt. Together, machinery and transport equipment and basic manufactures made up 45.7% of total exports in 2013.
Serbia's current account deficit was 4.9% of GDP in 2013 and it will widen to 5.0% in 2014. Serbia is working to lure industrial investors to export industries to cut its reliance on imports and narrow the trade deficit. FDI inflows finance the external gap.
In late 2013, the government adopted a set of austerity measures that included increasing the VAT on foodstuffs, cutting subsidies, reducing the informal economy, curbing new hiring in the public sector until 2016 and imposing a so-called “solidarity” tax on civil servants' earnings. In 2013, both the income tax and the VAT rate were raised. New legislation, which will be a by-product of Serbia's accession talks with the EU, should improve the regulatory environment governing foreign investment. It is estimated Serbia is currently losing more than $210 million per year due to tax evasion.
The role of the state is being reduced and the private sector's share in total employment has risen. State ownership in banks is also being phased out. However, the remaining state-owned firms continue to experience significant losses. The government has stepped up its fight against corruption and organised crime as part of its effort to achieve the EU membership.
According to the USAID, the informal sector represents about 30% of GDP. Government officials believe the sector employs up to 600,000 unregistered workers and costs the government 1.5 billion euro per year. High taxes on labour and, complex tax procedures are some of the reasons for the large size of the informal sector.