WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

In Q1 2025, GDP grew by 2% year on year – a clear slowdown compared to the previous two years, though broadly in line with expectations. The main reason for the slowdown was investment, which fell by 1% – the first such decline since the onset of the pandemic. This was largely due to a collapse in FDI inflows – down to half the level of a year earlier – reflecting global uncertainty in the wake of Donald Trump’s return to power and the domestic political crisis. Public investment also dropped – by 8% in real terms – likely a result of the government’s struggles to implement projects amidst mounting protests. On a more positive note, industrial production rose moderately, while exports of goods and services grew more robustly. However, this was probably due to an increase (ahead of the new tariffs) in EU exports to the US (in which Serbia plays a part through its supply chains) and is unlikely to last. Inflation has started to slow, but only gradually, reaching 4% in April. Since these trends are in line with our expectations, we are maintaining our forecast unchanged from spring. Politically, the student protests – which have been going on for over six months – have evolved into a wider movement calling for early elections. The waning support of the ruling coalition has led it to resist these calls so far, but it is unlikely to be able to hold out for much longer. Local elections held in June in two municipalities – Kosjerić and Zaječar – showed that support for the ruling party has weakened significantly: while it narrowly held onto both towns, its results were far weaker than in previous elections. We therefore expect early elections by year-end; recent announcements of wage and pension hikes provide a powerful signal that this is indeed likely.