EC Forecasts GDP Contraction of 4% in Serbia This Year, Rebound of 6% Next One

Following two years of strong GDP growth, the Serbian economy is projected to contract sharply by around 4% in 2020, followed by a strong rebound of 6% in 2021. the European Commission says.

In the Serbia section of the Spring 2020 European Economic Forecast, the EC says that private consumption and investment are expected to fall in 2020 due to lockdown restrictions, confidence effects and uncertainties, before a strong recovery in 2021. Due to the economic contraction and sizeable fiscal mitigation measures, the general government deficit is forecast to rise sharply in 2020 followed by a strong reduction in 2021. The debt-to-GDP ratio is set to increase temporarily by around 10 percentage points in 2020, the EC says.

In the Spring Economic Forecast, a record drop of 7.75% is expected in the euro-zone and then a growth of 6.25% in 2021. As for the economy of the entire EU, a drop of 7.5% in 2020 and a growth of around 6% in 2021 are expected.

As the EC says, the projections of growth for the EU and the euro-zone in the new report are down by around 9 percentage points compared to those from the 2019 Autumn Forecast.

As for the candidate countries from the region, a drop of 4.8% is expected in Albania in 2020, followed by a growth of 4.2% in 2021, Montenegro should see a drop of 5.9% this year and a growth of 4.4% next year, whereas North Macedonia will experience a drop of 3.9% in 2020 and a growth of 4% in 2021.

In the Serbia section of the report, it is said that short-term indicators suggest that growth remained robust in the first quarter of 2020, but the positive outlook came to a sudden halt due to the outbreak of the COVID-19 pandemic. The government declared a state of emergency on 15 March, imposing a series of containment measures, including a 12-hour daily curfew, the closure of all non-essential shops, restaurants and cafés, and transport shutdowns. A first gradual relaxation of lockdown measures started to be envisaged as of late April.

Unemployment is expected to rise temporarily. While government measures are expected to mitigate lockdown-induced job losses, the economic contraction is nonetheless expected to temporarily interrupt the continuous decline of unemployment over the last five years.

Inflation is set to moderate further in the short term, reflecting lower oil prices and subdued domestic demand, while rebounding in 2021 due to the recovery.

The EC says that the growth outlook is subject to high uncertainty with risks tilted to the downside.

As said, while a potential faster lifting of the main restrictions might allow for an earlier and stronger rebound, a potentially more protracted duration of restrictions on some sectors may more persistently affect consumer confidence and consumption patterns, thereby dampening the economic recovery.

In this regard, the effectiveness of measures to protect household disposable income and business liquidity will also be essential, the report reads.

On the external side, a potential stronger contraction in main trading partners would weigh on Serbian exports and investment.

The COVID-19 crisis is set to deteriorate sharply the deficit to 7.5% of GDP in 2020, but the deficit is forecast to drop sharply to 2% of GDP in 2021, the EC says.

The debt-to-GDP ratio is projected to rise above 60% in 2020 reflecting both the high deficit and low GDP developments, before resuming its gradual decline in line with the economic rebound and lower deficit developments in 2021.

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