Serbian economy grew stronger in first quarter of 2011 - Inflation and public debt still endanger stability

Judging by the statements of certain officials, Serbia has come out of the crisis that first hit it in late 2008. According to the preliminary data, a 3 percent growth was registered in the first quarter of 2011 against the same period last year. However, challenges that are characteristic for the domestic economy - inflation, unemployment, low level of investments, growing public debt - are still present.

Basic trends

The first quarter of this year was also marked by an unexpected strengthening of the national currency, which was caused by a significant issue of bonds in euros. In that way, the foreign currency inflow was high, thus effectively reversing the trend of Dinar's decline, which was present from the very beginning of the crisis. However, since this new trend has contributed to the artificial improvement of the living standard, prices have not been decreased, while the foreign-trade competitiveness of the domestic goods has dropped. In the light of the proclaimed aim - transfer to the export-oriented model of economic growth, the strengthening of Dinar is not a good news.

The announced supplement to the Public Procurement Law is considered a favorable news, which may bring to the improvement of liquidity of the domestic economy. Also, the adoption of a set of financial laws, particularly the Financial Leasing Law, should have a positive effect only on the strengthening of the financial sector.

Economic activity

In spite of unfavorable announcements for the year 2011, a 3 percent economic growth was registered in the first quarter. Industrial production grew slightly in that period and then dropped by 0.7 percent in April when compared to March. We expect further stagnation of the processing industry this year, primarily due to the effects of high inflation and "strong" Dinar, which endanger both domestic and foreign exchange of goods.

The energy sector has potentials since significant investments have been announced for this year, which is why we expect bigger revenues from this branch of economy in the total GDP. The real estate, financial mediation and construction sectors may feel the healing effects of the adoption of the Financial Leasing Law, which should enable the real estate leasing.

Prices

The further trend of the prolonged growth of prices could have been felt in the first quarter. That trend is a result of, first of all, increase in the prices of food and agricultural products, as well as fuels. Creators of the economic policy tried to fight the growth of prices in several ways: by placing a ban on export of wheat and increasing the reference interest rate, but it seems that inflation has deep roots. Changes in prices of electric energy, in effect since April, and the announced gas price increase suggest that prices will continue to grow.

According to the forecasts of the NBS and the World Bank, inflation is expected to reach its upper limit in mid-2011, after which it should drop. In spite of such expectation, we doubt that the inflation by the year's end will stay within the limits of 4.5 percent +/- 1.5 percent. Successful agricultural season, as well as settling of the oil price in global markets, may stabilize the prices in Serbia, but it is not for sure since these two aforementioned factors are out of the reach of our creators of economic policies.

On the other hand, the growth of the reference interest rate positively affects inflation, but it also increases the prices of bank loans, which has a negative effect on the economic recovery, thus prolonging the current situation. Despite the formation of the Fiscal Council, it is still possible that inflation will grow because of the forthcoming elections.

Employment and salaries

In spite of the continued growth in the first quarter of 2011, we do not expect the employment rate to grow in the forthcoming period. It is possible that the unemployment rate will drop by maximum 2-3 percent by the year's end if the favorable trend of economic growth continues.

Average salary at the end of the last quarter amounted to RSD 39,000. That is a good news for employees, especially those in public sector.

M.D.