III – Macroeconomic Sustainability
III A — Macroeconomic Balance: The First among Economic Fundamentals
A.1. Macro-developments since the fiscal consolidation
This section traces Serbia’s economic trajectory from the fiscal consolidation of 2014–2017 to the present day. The consolidation was a necessary response to an impending debt crisis, and it did create fiscal space that could have been used for genuine development. But it was not, as the economy’s productivity initially declined and then recovered very slowly.
The aggressive attraction of FDI did reduce unemployment from crisis levels—but the model that delivered those gains has never been upgraded. It relied on cheap labor and generous subsidies rather than building the institutional foundations for sustainable growth.
The result is an economy that appears to grow yet fails to develop—where headline GDP figures until recently masked a deepening structural malaise. The labor market has tightened dramatically even as unemployment remains above 8%, revealing not a success story but a profound mismatch between the skills the economy produces and those it requires.
The real exchange rate appreciation has been pronounced and accelerating. Serbia’s real effective exchange rate appreciated by 16.3% between 2013 and 2024—making the Serbian dinar one of the most appreciated currencies in the region.
Table 1. Three macroeconomic periods: key determinants
| Indicator | 2015-2017 | 2018-2021 | 2022-2024 | 2025 |
|---|---|---|---|---|
| GDP growth | 2.2% | 4.1% | 3.5% | 2.3% |
| Investment contribution to GDP growth | 1.0% | 2.3% | 1.5% | 1.6% |
| Government CAPEX (% of GDP) | 2.7% | 5.2% | 6.9% | 7.1% |
| FDI (% of GDP) | 5.8% | 7.2% | 6.4% | 3.7% |
| Exports contribution to GDP growth | 3.7% | 3.7% | 4.5% | 4.3% |
| Inflation (avg annual % change) | 2.0% | 2.4% | 9.7% | 3.9% |
| Unemployment rate (end of period) | 14.5% | 11.0% | 8.6% | 8.2% |
| Vacancies-unemployment ratio | 0.11 | 0.16 | 0.32 | 0.48 |
Note: Simple averages of annual growth rates. Vacancies-unemployment ratio computed as number of vacancies / number of unemployed persons.
Period I: Fiscal Consolidation (2014-2017)
The comprehensive fiscal consolidation program was initiated at the end of 2014, primarily driven by concerns over rapidly rising public debt and persistent fiscal deficits that emerged in the aftermath of the Global Financial Crisis. During the post-GFC period, Serbia experienced weak economic growth and increased unemployment peaking at 24% in 2012, even though fiscal policy was used in a largely accommodative manner. Public debt in nominal terms doubled between 2011 and 2015 as both the public utilities and the illiquid state-owned enterprises under restructuring became a large and increasing fiscal burden.
A sharp adjustment was needed to stop public debt from spiraling. With the reduction of pensions, wage expenditures (freeze of both wages and employment) and strongly improved tax collection (2.5 p.p. of GDP in 2014-2017), the risks of a fiscal debt crisis were forestalled, and inflation was brought to heel.
Period II: FDI-Driven Growth (2018-2021)
Following the end of fiscal consolidation in 2017, European investments seeking new efficiencies and nearshoring had just picked up in 2018. With Serbia’s macroeconomic stabilization and strong political support from Germany, the country was seen as a stable and attractive destination.
- FDI flows into Serbia increased by 66% from 2017 to 2021
- Government infrastructure investments increased twofold (in % of GDP)
- Export of goods and services grew 7.9% and 8.5% annually on average
Serbia’s performance during the COVID crisis had been particularly impressive as its GDP declined by only 1% in 2020.
Period III: Inflation, Sectoral Shift, and Labor Market Tightening (2022-2024)
The period 2022-2024 was marked by the energy crisis set off by the war in Ukraine and accelerated inflation. The inflation rate peaked at 16% at the beginning of 2023, driven mostly by the surge in food prices.
In addition to exogenous geopolitically-caused shocks, a substantial part of the crisis can be attributed to endogenous problems—specifically, the catastrophic mismanagement of Serbia’s state-owned electricity company EPS, which suffered a major breakdown in late 2021. The Fiscal Council estimates losses of Serbian state-owned electricity and gas companies to be around €1 billion, most of which was financed directly from the government budget.
The main contributors to growth in this period were:
- Mining — mainly coming from China, into eastern Serbia copper and gold mines
- Construction sector capacity expansion
- Knowledge services (ICT and professional services) — exports grew 31% on average annually, reaching 5% of GDP in 2024
Labor Market Tightening
Among the economic phenomena characterizing Serbia’s macroeconomic developments over 2022–24, possibly the one with the most far-reaching effects is the extreme tightening of the labor market.
Employment in Serbia had reached bottom in 2014, with around 1.845 million employees and unemployment peaking in 2012 at 24%. From that point employment increased gradually at first, and with the large employer incentives and acceleration of GDP growth, it increased by 2.5 percentage points annually in 2017-2021.
In only three years, however:
- Job vacancies increased from 82,000 to 223,000
- Number of unemployed: 370,000
- Vacancies at 60% of unemployment in a country where unemployment remains above 8%
This extraordinary disparity is not a sign of success. It indicates a systemic failure of Serbia’s education system and labor market institutions, and the essential absence of a workforce development policy.
Macroeconomic Developments in 2025
The year 2025 is a departure from the previous nearly decade of relatively strong growth. Starting from the very first quarter, GDP growth dropped to about 2% year-on-year.
Expectations for 2025 were in the range of 3.5-4%, so the drop was sudden. The slowdown has deeper roots:
- Chinese investment projects in mining in eastern Serbia nearing completion
- ICT inflows connected to Russian and Ukrainian immigrants ending
- Disruption of the type of ICT present in Serbia (mostly outsourcing and coding) by AI
- Construction capabilities expansion for Expo 2027 winding down
SME Export Performance: An Early Warning
Of significant concern is the apparent very weak performance, likely decline, of SME exports. This makes 2022-2025 the first period in CEVES’ monitoring since 2015 in which SMEs have substantially lagged in goods exports behind the total.
This is the most telling indicator of the model’s failure. SMEs are the enterprises most exposed to the real domestic business environment—they cannot negotiate special deals, cannot secure subsidies large enough to offset structural disadvantages, cannot simply relocate when costs become uncompetitive.
Between 2022 and 2024:
- Labor costs per employee in manufacturing increased by approximately 31% for domestic SMEs (plus 13.4% in 2025)
- Producer prices in manufacturing rose by only 2.5% (plus 0.9% in 2025)
Reported closures and layoffs among foreign investors affected approximately 1,000–1,500 jobs in 2024, and trade unions estimate they will potentially affect as many as 9,000 in 2025. These companies are relocating to North Africa, particularly Morocco and Tunisia.
III B — The Real Exchange Rate: The Mechanism
Over the past years Serbia has seemed to defy the maxim that in order to grow sustainably, an economy needs to have a conducive business environment and strong institutions. How has growth continued despite the systematic degradation of institutions?
The answer lies partly in macroeconomic stability—the fiscal consolidation did create real benefits that persist—and partly in timing: Serbia happened to become attractive to FDI just as competitor locations became more expensive. But a crucial part of the answer is that the costs of institutional degradation accumulate gradually and manifest with a lag.
How Real Exchange Rate Appreciation Works
In general, a RER appreciation happens when domestic prices rise faster than those internationally, expressed in the same currency. The distinction between tradable and non-tradable goods is critical—because unless there are significant trade barriers, the prices of tradable goods are contained by the international market.
Hence, a RER appreciation means that the prices of non-tradable goods have increased by more than the prices of tradables. This can be a problem for competitiveness because non-tradable goods are inputs in the production of tradables, and margins will be squeezed. In particular, labor is the most important non-tradable service, so typically a RER appreciation means that real wages have increased as well.
The ‘Dutch Disease’ Framework Applied to Serbia
The pattern observed in Serbia fits what economists call ‘Dutch Disease’—originally describing the negative effects on manufacturing when natural resource exports boom, but applicable more broadly to any situation where capital inflows into certain sectors crowd out others.
In Serbia’s case, the ‘boom sectors’ have evolved over time:
- First, heavily subsidized FDI into low-cost manufacturing played this role
- Subsequently, FDI shifted toward non-tradable sectors (construction, real estate) and mining—sectors that generate strong demand pressure domestically without proportionally increasing the supply capacity of the tradable goods sector
Why the Supply Response Has Been Constrained
Normally, acceleration of FDI is not a cause for concern because it typically affects the supply response of the economy almost simultaneously. However, in Serbia the local supply response is constrained.
If the business environment discourages domestic investment, and the inimical regulatory culture actively lowers productivity, the domestic economic activity effect of even well-designed FDI would be lower than expected. That policies discriminate against domestic SMEs—through the tax system, through the allocation of subsidies, through access to credit during monetary tightening—makes matters worse.
III C — Evidence of Competitiveness Loss
Productivity Divergence Across Sectors
The performance of productivity differs substantially across sectors:
- ICT sector — productivity increases quite steadily
- Mining — turnaround in 2020, after major investments in the Bor region
- Manufacturing — productivity declines by approximately 20%
- Non-tradable sector — productivity increased by over 23%
Wage Costs Versus Productivity: Regional Comparison
The problem becomes much more serious when flat or declining productivity is coupled with fast-rising real wages. By 2021-2022, Serbia’s wage/productivity ratios in most industries became higher than in the CEE average—and this is hard to justify with simple convergence.
Price Level Comparisons
Table 2. South East Europe: Comparison of Price Levels (2024)
| Country | GDP % of EU | Overall | Food | Clothing | Furniture |
|---|---|---|---|---|---|
| Croatia | 57% | 76 | 104 | 94 | 86 |
| Romania | 49% | 64 | 78 | 85 | 75 |
| Bulgaria | 41% | 61 | 87 | 79 | 68 |
| Serbia | 32% | 67 | 96 | 90 | 89 |
| Bosnia & H. | 21% | 63 | 83 | 103 | 70 |
| N. Macedonia | 20% | 55 | 73 | 78 | 62 |
Source: Eurostat prc_ppp_ind (2024 data, December 2025 release). Price levels EU-27 = 100.
Serbia exhibits a pronounced price-income mismatch that defies economic logic and confirms the extent of real overvaluation:
- Despite having only 32% of EU average income—lower than Croatia (57%), Romania (49%), and Bulgaria (41%)
- Serbian food prices stand at 96% of EU levels, approaching Croatia (104%) which has income nearly twice as high
- Citizens of Belgrade now pay near-European prices on Balkan wages
Summary: The Competitiveness Challenge
The evidence paints a consistent picture:
- Real exchange rate appreciation: Serbia’s REER appreciated by 16.3% since 2013, with acceleration in recent years
- Productivity decline in manufacturing: Manufacturing productivity has declined by about 20%, even as non-tradables increased
- Wage-productivity divergence: Wages have converged rapidly toward CEE levels, but the wage-to-productivity ratio in manufacturing now exceeds the regional average
- Price level mismatch: Prices are extraordinarily high for Serbia’s income level—particularly for food and furniture
- Non-tradable price acceleration: Non-tradable service prices have risen sharply since 2021
The combination of these factors explains the emerging difficulties of Serbian exporters, particularly SMEs, and the relocation of low-cost manufacturing to North Africa. The model has hit its limits.
Nominal depreciation cannot solve a real exchange rate problem—it would merely trigger inflation that offsets any competitive gain. The only sustainable path forward is productivity growth, and productivity growth requires:
- Functioning institutions
- Genuine policy capacity
- A level playing field for domestic investment
- A business environment that rewards productive entrepreneurship rather than political connections
Without a change in the structural policies that have generated this pattern—and more fundamentally, without a change in the governance that has made those policies impossible—the competitiveness pressures will only intensify.