Economic growth in Serbia has been accelerating recently, driven by final consumption and investments, while the structure of the domestic economy is changing. The production of auto parts and mining are increasingly playing significant roles in this transformation. However, insufficient private domestic investment, ongoing geopolitical tensions, weak growth in EU countries (Serbia’s traditional trading partners) and the devastating consequences of frequent weather disasters could affect future growth prospects. These are some of the key findings from two related reports on macroeconomic and business perspectives in Serbia, recently published by EY Serbia.
Economic growth in Serbia has been accelerating since mid-2023, with notable changes in its structure and sources compared to previous periods. After reaching around 3.8% growth in 2023, the first half of 2024 saw growth of approximately 4.3% year-on-year, and this rate is expected to remain around 4% in 2024 and 2025.
This acceleration is partly due to more expansive fiscal policies, which have resulted in significant salary increases in the public sector and a rise in public investment. Along with slowing inflation, this has created space for real consumption growth. Real wages increased by about 10% year-on-year by the end of August 2024, while spending on public investments rose by as much as 16% in the same period.
Despite the recession in Germany, Serbia’s economic performance in 2024 is also benefiting from China’s increasing involvement in investment and trade activities. This diversification is partly compensating for the weaker demand for domestic goods due to slow growth in key trading partners, particularly Germany and Italy. This shift towards the East coincides with the arrival of several large Russian companies in the information technology sector. This has helped mitigate the turbulence in the domestic IT sector, which was affected by disruptions in the global IT market in 2023, centered in Silicon Valley.
The main drivers of economic growth in 2024 have been household consumption and ambitious government investments in intensive construction projects related to transport, energy, and other public infrastructure. This model is expected to continue in the coming period, especially given the ambitious public investment plans and relatively solid fiscal position, which is also reflected in the recent upgrade to an investment-grade credit rating of BBB- by S&P.
Shifts in the industrial fabric
These deep structural changes are visible both at the macroeconomic and micro levels, impacting individual companies and sectors. Retail and construction, particularly civil engineering, have been leading the economic growth in recent quarters. In the first half of 2024, these sectors generated around one-third of the total GDP growth for the same period.
Our analyses indicate that the industrial fabric is changing, with an increasing share of auto parts production. One of the largest investors in this sector in recent years has been the Chinese tire manufacturer Ling Long. This sector, which is almost entirely export-oriented, has not only seen growth in physical production volumes but also an evident rise in manufacturing sophistication. Companies in this field supply the global automotive industry with increasingly complex components, and the assembly of electric vehicles is expected to begin soon at the Stellantis plant in Kragujevac.
Mining is also playing an increasingly significant role in the overall economic results. The largest company in this sector, Chinese Zijin, has significantly increased production capacity, primarily in copper extraction, since entering the ownership structure of RTB Bor. As a result, the share of the metal ore extraction sector in GDP has reached around 2%, about four times higher than in 2018.
The economic fabric is also changing under the pressure of increasingly frequent and devastating weather conditions. Average temperatures are rising, while rainfall is decreasing. In 2024, a prolonged period of extreme drought occurred, peaking in August, with precipitation levels about 90% lower than the long-term average.
This directly and severely impacts agriculture and (hydro)energy sectors. For example, 2024 corn production was about 20% lower compared to the previous year. The production of electricity was reduced by about 10% year-on-year in the first eight months of 2024, negatively affecting economic activity, exports, and prices.
In addition to these directly affected sectors, many others have been indirectly impacted. For example, the reduced agricultural output negatively affects the demand for agro-technological products and fertilizers, which in turn affects domestic producers and traders of these goods.
Rising uncertainty and investment opportunities
Alongside these changes, geopolitical tensions are growing, which deepens business uncertainty. Unstable conditions, as in the previous two years, particularly affect expectations regarding energy and raw material prices. However, inflation slowed in the first half of 2024 and has since stagnated at around 4%, which is expected to persist for the remainder of 2024 and into 2025. As a result, high interest rates, which were the response of monetary authorities in the U.S., Europe, and Serbia, began to gradually decrease in mid-2024. The National Bank of Serbia lowered its reference rate from 6.50% to 5.75% in October 2024.
Uncertainty, as well as potential investment and business opportunities in Serbia, also stem from emerging changes in international trade of industrial products related to new technologies, driven by green and digital transformation. In global trade, where China dominates advanced technologies, protectionism is on the rise, and new regulations are being introduced due to concerns about clean and green production, which helps prevent climate change.
In this environment, the business of the European automotive industry, in which Serbia’s manufacturing industry has been heavily integrated over the past decade, is facing challenges. This comes at a time when the production of electric vehicles, such as the Panda brand, is set to begin at the Kragujevac car factory.
