Comparative overview of projections of the NBS and some international financial institutions – objectivity, intention or something else?

Taking into account that the Serbian economy has recorded a faster than expected recovery for the fourth month in a row and that some segments of the economy have already reached pre-crisis levels of activity, the NBS has revised its central GDP growth projection for 2020 from -1.5% to -1.0%. The NBS sees the risks to the projection as tilted to the upside, i.e. anticipates a possibility of the year-end figure being even better than -1.0%, despite the uncertainties and risks stemming from the international environment.

On the other hand, some international financial institutions show pronounced and frequently exaggerated pessimism when it comes to Serbia’s economic outlook for this and the next year. While this may have been understandable in March and April in the absence of adequate economic indicators and when all of us were facing heightened uncertainty as to the future course of the pandemic and its consequences, it cannot be understandable today, when we have publicly available and internationally accepted and comparable macroeconomic and fiscal statistics for more than a half of the year.

In its latest macroeconomic projections for Serbia, the World Bank has assessed that Serbian GDP would decline by 3.0% in real terms this year, while the EBRD has put forth an even more negative estimate of a real decline of 3.5%.

Although this is a relatively complex economic indicator, a simple calculation leads to the conclusion that such projections are of very low probability. One needs only take into account the actual figures in the first half of the year and see what needs to happen in the second part of the year in order for such projections to materialise at the level of 2020.

According to official and internationally comparable data of the Statistical Office of the Republic of Serbia, in H1 Serbian GDP contracted by 0.8% y-o-y, which is one of the three best economic outcomes in Europe. In Q1 2020 the Serbian economy rose by 5.1%, while thanks to the timely reaction of economic policy makers, the decline in Q2 was limited to 6.4% – a contraction much softer than the ones experienced by the majority of other European countries in Q2.

Without going into the technicalities of projection methods, which vary across institutions, a simple arithmetic calculation shows that in order for Serbian GDP to decline by 3% or more than 3% in 2020, its y-o-y decline in the second part of the year would have to exceed 5%, which would practically mean the same or similar result as in Q2, when the major part of the Serbian economy was either in a halt or operating at reduced capacity. It is evident already based on publicly available July and August data that such scenario is practically impossible. Industrial production has recorded y-o-y growth in both July and August, same as retail trade and labour market indicators, while exports are on the path of normalisation. At the moment, based on July and August data and very conservative assumptions for the rest of the year, the NBS estimates that in the second half of the year GDP will drop by 1.2% y-o-y, with a great probability of an even better result, taking into account the dynamics of construction, the pace of industrial rebound and the state of the labour market.  
Looking at quarterly GDP dynamics, excluding seasonal effects, we estimate that in Q3 Serbian GDP will rise by over 6% in s-a terms compared to the quarter before, while Q4 is expected to see a further economic recovery and the growth of around 3% s-a relative to Q3. Such estimate shows that the recovery is by no means exhausted and that it is uneven across sectors, but that for the time being in the case of Serbia it surely does have the shape of the Latin letter “V“.

What are the key factors underlying such Serbia’s economic performance and the NBS’s projections?
•       The first factor is the fact that we adopted a sizeable and comprehensive package of monetary and fiscal measures and, equally important, that such package was adopted swiftly, preventing a fall in business and consumer confidence and preserving jobs and production capacities. The package of economic measures amounts to around 12.5% of GDP, and this figure excludes the effects of the loan moratorium. Apart from imposing a moratorium on the payment of household and corporate liabilities, the NBS is one of the first central banks in Europe to have responded most promptly by other measures too, primarily by cutting the key policy rate by a total of 100 basis points and timely providing sufficient dinar and FX liquidity, thus preserving full stability of the banking system.   
•       The second factor is equally important and relates to the achieved and preserved stability, which is often overlooked or taken for granted, but thanks to which Serbia entered the new crisis in a much better position than the last one. In the course of the pandemic, Serbia managed to maintain full price stability and overall macroeconomic and financial stability, underpinned by the stability of the exchange rate. A solid inflow of FDIs during the pandemic also speaks in favour of this.

In the coming period the NBS will continue to carefully monitor domestic and international macroeconomic and financial trends, as well as to exercise an objective and conservative approach in forecasting key macroeconomic indicators. With its monetary policy the NBS will do everything it can to preserve favourable terms of financing for households and corporates and to sustain a rise in their disposable income. Along with the gradual recovery of external demand, this will help Serbia achieve a GDP growth rate of around 6% next year, whereby it will not only reach, but also very quickly overshoot the pre-crisis level of the overall economic activity.

Governor's Office