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On December 18th the World Bank released an estimate for a real GDP contraction of 2% in Serbia in 2012.

Analysis

Bad news keeps coming out of Serbia, with the World Bank being the latest organisation to revise down its growth estimate for 2012, to the worst economic performance in the western Balkans. Unemployment has rocketed, to 26.2% in October, with 170,000 jobs being lost in 2012. Inflation is running in double digits, following a food price shock, and the dinar is under pressure. FDI inflows have dried up as investors have taken flight from Serbia's economic malaise.

There are several reasons why Serbia has performed so badly. Like other countries, it has been adversely affected by the euro zone recession (we estimate a contraction of around 0.5% in the euro zone in 2012). Along with its neighbours, Serbia had to contend with severe winter weather in early 2012, which had a negative impact on economic activity. The region-wide drought had a devastating impact on agricultural output. In common with others, Serbia has been badly affected by rising international food prices.

There are some Serbia-specific explanations too. The election in early 2012 led to fiscal loosening in 2011 and left the incoming government facing a budget deficit in excess of 11% of GDP. Ensuing budget adjustments depressed consumption. The unemployment rate is among the highest in the region, having risen inexorably since a low of 13.3% in March 2008, and this has kept domestic consumption at rock bottom.

The government forecasts growth of 2.5% in 2012, banking on production at the Fiat plant in Kragujevac. Agriculture is also expected to bounce back. These are potential bright spots for Serbia. However, the gloomy outlook for the euro zone, for which we forecast another year of economic contraction, does not bode well for demand growth in Serbia's main export markets. If the government signs a new arrangement with the IMF, it will be under pressure to persist with fiscal consolidation and structural reforms, both of which will have a negative impact on employment and domestic demand.

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