Serbia’s economy is projected to expand by a real 1.1% in 2014 and by 1.9% in 2015, the European Commission said in the Spring 2014 Forecast announced on May 5. In the previous edition of the forecast published in February, the commission was expecting growth rates of 1.3% and 2.2%, respectively. The EC noted that stronger than anticipated decline of public and private consumption and investments will dampen Serbia's growth prospects in the mid-term. Risks to growth remain on the downside reflecting delays in structural reforms and further strong fiscal consolidation efforts, the EC added.

Serbia recorded a stronger than anticipated export-led recovery of 2.5% last year thanks to a 16.6% y/y increase in sales abroad. Export growth is to remain robust this year as the EU countries, which are Serbia’s main trade partners, recover. The launch of EU accession talks might also boost investment activity, the EC said.

Nonetheless, growth will weaken in 2014 as private consumption will remain depressed, dragged down by high unemployment at over 22% in both 2014 and 2015 and sluggish credit growth. Government spending curbs will also dent public consumption and investment.

Serbia's economy is already showing signs of a slowdown. The GDP rose a mild 0.4% y/y in real terms in January-March 2014 after expanding by 2.7% y/y in Q4 2013, according to the statistics institute’s flash estimate released on April 30.

According to the EC, inflation will ease markedly to 3.8% in 2014 from 7.8% in 2013 due to the weak domestic demand, relatively stable food costs and exchange rate. It will accelerate slightly to 4.5% in 2015 but will stay within the central bank’s target tolerance band of 2.5% to 5.5%.

Serbia's current account deficit should narrow to 4.6% of GDP in 2014 from 5.2% in 2013 and further decline to 4.3% of GDP in 2015, the EC forecast. The commission noted, however, that the space for improving the current account gap is expected to be exhausted in 2015 as domestic demand and imports start to slowly recover.

The 2014 budget deficit is projected to increase to 6.3% of GDP from 5.0% a year ago due to higher interest and investment expenditures and social spending related to the planned restructuring of state-owned companies. The EC warned that fiscal consolidation remains a key challenge for Serbia and in absence of additional austerity measures the public debt to GDP ratio will exceed 70% of GDP in 2014. The debt is expected to rise further to 74.4% of GDP in 2015.

The EC’s forecast is broadly in line with the IMF’s latest projection which sees Serbia’s public indebtedness rising continuously in the mid-term and exceeding 80% of GDP by 2014. It contradicts with the Serbian government's fiscal strategy that sees a gradual reduction in the public debt after 2016. According to the government's strategy published at end-2013, Serbia's public debt should reach 67.2% of GDP in 2014 and stabilize at around 70% of GDP in 2015 and 2016 before starting to gradually decline in 2017, mainly due to falling budget deficits.