Serbia's central bank NBS has revised down its 2014 GDP forecast to 1.5% in its November inflation report from 2.5% in the previous such report issued in August, saying the government’s new basket of austerity measures is expected to dampen consumption next year.

The central bank kept its 2013 growth outlook unchanged at 2.0% despite improved growth prospects for the euro area economy.

The Serb government proposed a second set of budget consolidation measures on October 8, including raising the lower VAT rate to 10% from 8% currently, introducing solidary tax on above average public sector wages and cutting public expenditures for goods and services as well as subsidies. According to NBS, despite their negative short-term impact on domestic demand, the measures must be implemented in order to ensure the public debt sustainability and macroeconomic stability in the medium term.

Serbia’s 2014 GDP expansion will be driven by rising industrial and agriculture exports. The euro area recovery and the expected start of EU membership negotiations will also likely boost investment activity in 2014, likewise contributing positively to the GDP growth, NBS said.

NBS' new growth outlook is less optimistic that the IMF expectations for a 2.0% GDP expansion in 2014 but it fully matches the latest 2014 growth projection of the European Commission issued earlier in November. It is above the government’s forecast for 1.0% GDP expansion next year.

NBS also said Serbia’s external imbalances have been narrowing faster than anticipated. The country’s current account gap is forecast to decline to around 4-7% of GDP in 2013 from 10.5% of GDP in 2012, less than anticipated in the August report (7% of GDP in 2013). The improvement will come on the back of falling trade deficit.

Inflation will move within NBS' target tolerance band of 2.5% to 5.5% throughout 2014 reflecting weak aggregate demand.