For the last seven years, starting in 2018, the gross domestic product in Serbia has been growing two and a half times faster than in the European Union. In that period, according to the official data of the International Monetary Fund, Serbian GDP increased by a total of 26.5 percent, and in the EU by 10.2 percent. At the same time, the difference is significantly greater if you compare only the results achieved for last year and the IMF’s estimates for this year, because in those two years, Serbia’s GDP will grow by more than six percent in real terms, while in the EU it will only grow by 1.7 percent.
As things stand now, this difference could be even greater at the end of this year, because, according to the data of the Republic Institute of Statistics, the value of everything created in Serbia in the first three months of this year was realistically by 4.7 percent, and in the second quarter by 4.2 percent higher than in the same period in 2023. At the same time, according to Eurostat data, the GDP of the European Union and the Eurozone increased by only 0.8 and 0.6 percent in the second quarter of this year compared to the same quarter last year.
In the EU, therefore, the pace of growth was five times, and in the Eurozone seven times slower than in Serbia. Even the countries with the fastest growth in the EU – Poland with 1.5 and Ireland with 1.2 percent – lag significantly behind Serbia. The biggest problem is, however, Latvia, where a decrease of 1.1 percent was registered. The same problem plagues Sweden and Hungary, where GDP fell by 0.8 and 0.2 percent, and in the second quarter, with great disappointment, a 0.1 percent drop in economic activity was noted in Germany as well..
The construction industry, which in recent years generates between 5.5 and 6.4 percent of GDP, contributed significantly to Serbia’s faster economic growth, but also to the mitigation of the consequences of the decline in trade turnover.
Therefore, according to the growth rate this year, Serbia is at the very top of the ranking list of European countries. Only Turkey had slightly higher economic growth, with the fact that in that country inflation in July was almost 62 percent, so that growth was paid quite dearly, by far the highest inflation rate in Europe. On the other hand, inflation in Serbia in July was 4.3 percent, within the target framework of three plus-minus 1.5 percent, and it is expected to further decrease, which will be contributed to by the new action of the Government of Serbia “The best price”. within which the prices of a large number of basic products have been significantly reduced since September 1.
Citizens also benefited from faster real economic growth, along with the simultaneous stabilization of prices. This is evidenced by the latest data from Eurostat that in 2020 the average net salary in Serbia lagged behind the EU average by as much as 55%, and last year this gap was reduced to 46.4% or by 8.6 percentage points, because the average net salary in Serbia was 733, and in the EU 1,367 euros. At that pace, therefore, the average net salary in Serbia would equal the European average in 16-17 years, which just a decade ago seemed like an impossible mission.
Although this seems like a utopia to many, it should be borne in mind that in the first half of this year the average net salary in Serbia has already reached 826 euros, so this gap, even assuming that salaries in the EU have nominally increased by seven percent (for inflation of 2.8 and in real terms by 4.2 percent), further reduced to around 43.5 percent or by almost three percentage points. And that’s only in the first half of this year, and the continuation of that trend will be pushed by the decision to increase the minimum wage in Serbia by a record 13.7 percent starting next year.
Image 1. Serbia’s average net salary compared to the EU average
The key precondition for further accelerated rapprochement is that Serbia continues to grow economically faster than the EU in the coming period, and the new investment cycle, which includes record investments, should contribute to this. The “Leap into the future – Serbia 2027” program has planned investments of more than 17 billion euros in the next three years. Increased government investments from the budget will alleviate the consequences of the recession, which has already knocked on the door of some of the most developed European countries, primarily Germany, which has been unable to find new sources of growth for several years now, in changed geopolitical circumstances.
Unlike many developed countries, Serbia mitigated the recessionary tendencies, especially pronounced in 2020, at the height of the coronavirus pandemic, by increasing public capital investments. And precisely thanks to increased state investment, in accordance with the recommendations of the famous economist John Maynard Keynes, Serbia managed to stay on the path of stable growth.
In the last 12 years, wages have increased by 134 percent, and employment reached a record level in June 2024, with more than 2,315,000 employees.
The Fiscal Council stated this in its analysis, stating that in the previous three years, from 2021 to 2023, in the structure of budget expenditures, the state’s public investments came in third place, right after expenditures for pensions and salaries in the public sector. About five billion euros, about seven percent of GDP and more than 15 percent of total public expenditures, are now invested annually for these purposes.
The Fiscal Council stated that this is by far the largest share of public investments in Central and Eastern Europe and hardly any country in the world can boast of that, and this speaks volumes for how important capital investments are for the Government of Serbia. It is quite logical, because without quality traffic and other infrastructure, it is difficult to expect a record inflow of direct foreign investments in the coming period, which have stabilized at a level of more than four billion euros per year.
Years ago, especially until 2015, the Fiscal Council warned that the state was not investing enough in infrastructure projects, because until then, especially until 2012, public investments were less than three percent, while in the last few years they have stabilized at the level of around seven percent. of GDP. At the same time, only a decade ago, the share of all investments (state, foreign and domestic private) was 16-17 percent of GDP, and according to that, Serbia and Bosnia and Herzegovina were the worst ranked countries in Europe, doomed to impoverishment, because of how much you invest today it depends on what the pace of growth will be tomorrow. This is precisely why the share of fixed investments has increased to 23-24 percent of GDP in the last four years, and it may even increase by 2027.
As of 2022, investments in transport infrastructure have exceeded three percent of GDP, and Serbia now has about 1.1 kilometers of highways per 100 square kilometers, thus approaching the average of the countries of Central and Eastern Europe, and when all started highways are completed, will be far ahead of them.
Increased capital investments have changed the image of Serbia. This is evidenced by the latest report of the rating agency Moody’s, which cited “good medium-term prospects for economic growth, with the possibility that growth will be faster than expected due to the acceleration of investments and the continuation of structural reforms” as key factors for improving Serbia’s outlook. In addition, Moody’s, unlike the IMF, expects somewhat faster economic growth, this year by 3.8 percent and in the next by 4.2 percent, because growth, as they state, “will be supported by a further reduction in inflation, favorable market trends, strong domestic demand and the current investment cycle”.
That estimate has a realistic basis in concrete data, because in 2022 the state directed 3.4 billion from the budget to capital projects, last year it increased these expenditures to 4.8 billion, and by 2027 it plans more than five billion euros for these purposes annually. This, in turn, implies that, due to the realization of all the planned projects as part of the preparations for the great world exhibition Expo 2027, the share of public investments will be slightly higher than seven percent of GDP, as it was in the previous few years. After all, in its latest report, the rating agency Moody’s positively evaluates the program “Leap into the future – Serbia Expo 2027” and estimates that it will influence the increase of public investments by 2027 to as much as 7.5 percent of GDP.
Image 2. Allocation for capital investments from the budget of the Republic of Serbia
In addition to public investments, economic growth will also be driven by further growth in domestic demand, based on strong growth in average net wages, which in the first six months, according to data from the Ministry of Finance, increased by 9.4 percent in real terms, and pensions, which increased in real terms in the same period. as much as 15.2 percent. Average salaries should reach 1,400 euros by 2027, and pensions 650 euros, so it can be expected with a high degree of certainty that domestic demand will continue to be a strong lever of economic growth in the next few years.
In addition to salaries, which have increased by 134 percent in the last 12 years, employment is also growing, and in the middle of this year it reached a record level, because there were never before in Serbia more than 2,315,000 employees, as there were in June 2024. In other words, while from 2000 to 2012, around 400,000 people lost their jobs, 450,000 new jobs have been created since 2012. All those new employees, with much higher salaries than before, create demand on the market, which creates room for maneuver for further increases in domestic production, and thus GDP.
Faster economic growth will further push capital investments in transport, energy and communal infrastructure. Finally, Serbia turned on that, the second engine, which had not been used for years. Therefore, it is quite possible that in the next few years economic growth will be higher than four percent, as forecast by the IMF. After all, it would not be the first time that the IMF subsequently corrected the projected growth rates for Serbia upwards.
Acceleration of growth to four to five percent in 2025 and 2026, in accordance with the new investment cycle, is also expected by the National Bank of Serbia, which recently corrected the growth estimate for this year, from 3.5 to 3.8 percent. The NBS experts also noted that the acceleration of economic growth was largely due to increased fixed investments, due to the start of the Expo 2027 project.
Image 3. Fair and Expo 2027 exhibition space (source: RS Government)
Stating that, according to official statistics, the share of fixed investments in GDP last year was almost 23 percent of GDP, NBS experts expect that in the next few years, due to the new investment cycle, it will increase to around 25 percent of GDP . That expectation is based on realistic grounds, because, as stated by the NBS, in recent years, with relatively stable foreign direct investments (in the first half of this year, 2.3 billion euros have already flowed into the country, by 6.7 percent more than in the same period last year), established three new, strong pillars of investment financing. The first is the increased profitability of the economy, which can therefore invest more in the expansion of production from its own resources. The second is the increasingly generous investment loans from banks, and the third is government investment, which has doubled in the meantime.
With the increase of investments to 25 percent of GDP, it practically means that in the coming period, every fourth created euro will be further invested, whereby those investments will enable the creation of new added value. And how important each percentage of economic growth is, is evidenced by the calculation according to which, with an average growth rate of five percent, Serbia’s GDP would already exceed the set goal of 92.7 billion euros in 2027, which compared to 2012, would be an increase of as much as 60 billion euros or almost 200 percent.
The last six years have seen the greatest increase in investments in traffic infrastructure. Until 2018, one out of 1.5 percent was allocated for these projects, so that already in 2022, those investments would exceed three percent of GDP, with the majority of the money being used to finance the construction of new highways, so that Serbia now it has about 1.1 kilometers of highways per 100 square kilometers, and thus it has approached the average of the countries of Central and Eastern Europe, and when all the highways started are completed, it will be far ahead of them.
In the first quarter of 2024, the real growth of gross value added in construction of 14.2 percent was almost double that of wholesale and retail trade, transport and the service sector (7.3 percent).
Apart from the significantly increased investments in transport infrastructure, construction has contributed significantly to the faster economic growth in recent years, which in recent years has generated between 5.5 and 6.4 percent of GDP, significantly more than the 3.7 percent that its share was until 2013, with the fact that the GDP has doubled in the meantime. That is why a clearer picture is obtained if it is taken into account that the annual value of the construction works performed in that period increased 3.25 times, from 1.6 billion to 5.2 billion euros.
The positive trend continued in 2023, when Serbian GDP increased by 2.5 percent, while the value of construction works in current prices was 16.1 percent, and the real value was 8.5 percent higher than in 2022. Such dynamic growth construction mitigated the consequences of the real drop in turnover in retail trade by 1.8 percent and in wholesale trade by one percent and kept Serbia on a stable path of economic growth.
If other industries could also follow the pace of construction, the growth of Serbian GDP would be significantly higher, because the growth rates achieved in that sector for five consecutive quarters are really impressive, not only for domestic conditions, but also for the fastest growing world economies. Specifically, last year, in the second quarter of the construction sector, real growth in gross added value was achieved by as much as 15.1 percent, in the third quarter by 12.8 percent, and in the fourth quarter by 7.4 percent.
Even the countries with the fastest growth in the EU – Poland with 1.5 and Ireland with 1.2 percent – lag significantly behind Serbia. In the EU, the pace of growth in the last quarter was five, and in the Eurozone, seven times slower than in Serbia (4.7 percent).
The way the last one ended, this year continued, so in the first quarter of 2024, the real growth of gross added value in construction of 14.2 percent was almost twice as high as in wholesale and retail trade, transport and the service sector (7.3 percent) and almost five times higher than in industry (2.9 percent). In the second quarter, this difference increased even more in favor of construction, which created gross added value in real terms by 12.3 percent higher than in the same period in 2023, while the real growth of other sectors ranged from 0.8 percent (agriculture) to a maximum of 4.5 percent (service sector).
How important construction has become is evidenced by the official data that the entire industry contributed 0.6 and construction 0.7 percentage points to the GDP growth rate of Serbia in the second quarter of this year, while agriculture did not contribute even one per thousand. The importance of construction was also noticed by the authors of the publication Macroeconomic Analysis and Trends (MAT), who stated in the January issue that construction contributed more to Serbian GDP in 2023 than traffic, telecommunications and energy. And, judging by the data for the first half of the year, it will be the same this year.
Featured image: Ministry of construction, transport and infrastructure of Republic of Serbia
