The global economic activity showed resilience to both the energy crisis and geopolitical upheavals and all the challenges from the previous year
by Ivan Nikolić
From this issue, in cooperation with the Economics Institute and the Chamber of Commerce and Industry of Serbia, Diplomacy&Commerce magazine publishes MAT Brief, an excerpt from the Macroeconomic Analysis and Trends newsletter. In addition to articles from The Economist magazine, the new MAT Brief will round off our offer of top-quality economy-related articles and analyses essential for the operations of every large company, which will assist top managers with making the right decisions for their company and employees.
The conflict in Ukraine, which started earlier this year, had a decisive impact on the unfavourable prospects of global economic growth, especially in Europe. At the same time, inflationary pressures are weakening, now due to a sharp drop in the previously high prices of energy, raw materials and semi-finished products, after economic sanctions were imposed on Russia, but also after a real drop in demand and recessionary pressures due to the global restrictiveness of monetary policy. The world economy – judging by numerous indicators – is currently at a critical point. On the other hand, there are also modest signs of stabilization in 2023 as China began to open up, and in general, global economic activity showed resilience to both the energy crisis and geopolitical upheavals and all the challenges of the previous year. If the risks do not materialize in their most severe form, the recovery – albeit weak – would continue in this and the next year.
As for Serbia, according to the flash assessment of the State Statistics Office, the real growth of the country’s gross domestic product in the first quarter of 2023 compared to the same period of the previous year was 0.7%, with the tendency of an additional slowdown – estimated year-on-year real GDP growth for March fell to 0.3%. On the production side, the main positive contribution to GDP growth in the first quarter came from agricultural production, tourism and industry, while a decline was recorded in construction, commerce and the public sector (healthcare and education). The recovery of the energy sector continued. On the expenditure side, real GDP growth is driven by growth in private consumption, investments in fixed assets, as well as faster real growth in exports than imports of goods and services.
In the first quarter of 2023, the Republic of Serbia’s budget recorded a deficit of 28.6 billion dinars, which is significantly better than the plan for this period
In terms of external trade, the data also confirm slower dynamics, with the year-on-year growth of exports remaining in double digits, while the value of imports in both February and March of this year was lower than in the same months last year. Among other things, this could have been influenced by the calming down of certain import prices, which significantly increased in the second part of last year. In February, the value of external trade amounted to 6,422 million euros, and in March, 6,235 million euros, the export to import ratio went up from 69% in December last year to 80% in March 2023. For the first time in recent history, the current account of the balance of payments in two related months of January and February 2023 recorded a surplus, with the negative balance of payments amounting to only 111.8 million euros or 0.7% of GDP (a deficit of 1,532.2 million euros was recorded in the same period of the previous year). During this period, the net inflow of foreign direct investments increased by 39.6%. Foreign exchange reserves reached a new historical record of 21.6 billion euros at the end of April.
In the first quarter of 2023, the Republic of Serbia’s budget recorded a deficit of 28.6 billion dinars, which is significantly better than the plan for this period. Public debt is in a slight decline.
Inflation growth in March 2023 stopped at the level of the previous month, and that level is higher than earlier expectations and predictions. The National Bank of Serbia, therefore, continued to tighten its monetary policy, which affected the further growth of interest rates. However, this will not negatively affect financial stability for the time being, given the fact that the share of non-performing loans in total loans has dropped to a historic minimum of 3%.
The National Bank of Serbia continued to tighten its monetary policy, which affected the further growth of interest rates
As far as the forecast goes, we believe that the European economy, and thus Serbian, could return to pre-pandemic numbers in the medium term. The key risks are the following:
• the emergence of a new crisis in the global banking system, which would cause further tightening of financial policies. In practice, this means a drop in economic sentiment and confidence in the banking system, as well as the accumulation of forced savings and the abandonment of business plans and investment spending. This outcome would be even more unfavourable if a political solution for the U.S. public debt limit is not found in the coming weeks.
• the spread of financial stress from developed to underdeveloped countries is an already seen scenario, and in that case, there would be a drop in demand for imports, which would cause a reduced volume of trade and production decline.
• the appreciation of the U.S. dollar stimulates the owners of financial capital to withdraw their funds from risky investments and invest them in purchasing dollars, which will further appreciate this currency and at the same time, depreciate the national currencies of the countries where the withdrawal of funds occurs. Also, the appreciation of the dollar has a negative effect on the volume of world trade, since it raises its costs.
• inflation could prove to be persistent and resistant to monetary restriction measures, and this would require continued interest rate hikes.
• a further rise in interest rates, combined with high indebtedness, would cause huge problems with debt servicing, especially in the growing economies that need the funds the most.
• a halt in the recovery and opening of China, which absorbs the largest part of the world’s exports, would jeopardize all manufacturers of stock exchange products that trade with China. Currently, the Chinese construction and sale of residential and commercial space are at a standstill, caused by anti-epidemic measures. Prolonging this situation would slow down China’s recovery and lead to aggravation of financial risks.
• the escalation of the conflict in Ukraine and the deepening of geopolitical tensions would further worsen the economic situation and slow down the weak global recovery that has just begun. Not only would the energy crisis in Europe repeat itself in the coming winter, but the uncertainty surrounding the food supply would also increase, which would threaten underdeveloped economies the most.