On behalf of the Serbian Association of Economists we are pleased to invite you to the
The Kopaonik Business Forum (KBF) is a high-profile event committed to improving the performance of the Serbian economy through analytical contributions and dialogue between major relevant stakeholders. For more than three decades the event attracted a significant number of participants from the region. Partnership with Mastercard company secures additional support in achieving greater visibility and enhancing the quality of this important event. Recently, the Forum has been gathering on average more than fifteen hundred participants annually, including heads of state, prime ministers and ministers, high representatives of regulatory bodies, representatives of international financial institutions, respectable scholars, diplomats, business practitioners, and media.
As usual, the event is organized through plenary sessions, panel discussions, special events, and peer-to-peer sessions. Our exceptional roster includes over two hundred speakers from academia (mostly economics, business management, and ICT), politics, finance, and business. Flagship thematic studies from IFIs will be presented again at the KBF along with new academic and policy papers by leading researchers and scholars in topical fields. The KBF continues to provide a unique opportunity for participants to meet and discuss relevant issues. The title of this year’s annual meeting is:
SERBIA 2027:
AIMING FOR A HIGH-INCOME ECONOMY
KBF 2025 is again a four-day event.
Day Zero, Sunday March 2, will focus on analyzing recent macroeconomic developments and future trends in Serbia, while providing an outlook for the Western Balkan region in the year 2025 and beyond. It will also provide an overview of the forthcoming EXPO 2027 event, feature a traditional presentation of the most recent company reputation (KBF) index results, and a brief update on the status of the Digital Serbia Initiative. In addition, the extended Day Zero agenda will include panels exploring a gender perspective on a greener revolution, as well as a panel on creating global products within start-ups and corporations.
Day One, Monday March 3, will begin with keynote addresses by the Governor of the Central Bank of Serbia and the Minister of Finance devoted to major macroeconomic (monetary and fiscal) policy developments in Serbia, followed by an address from Prof. Branko Milanović, a Special Guest Speaker of this year Forum. The afternoon block of panels will be provided as a dual-track format in order to accommodate the diverse interests of the KBF participants. Panel 8 will bring together leading diplomats and geopolitical experts to discuss the effects of wars and trade tensions on Europe and the Western Balkans. The remaining panels (9-20) will span a variety of topics including powering digital economy, supporting innovation, managing population dynamics, leveraging AI in business, agendas related to infrastructure and connectivity, as well as an agenda pertaining to the insurance industry. In addition, Day One panels will introduce the innovative business in China, and provide a platform to discuss the likelihood of achieving a high-income economy in Serbia, and managing green energy transition, which will conclude the discussions of Day One. At the end, the participants will also have the opportunity to attend an engaging discussion with Mr. Ge Jun, CEO and Chairman of Tojoy, the largest-start up and innovative business platform from China.
Day Two, Tuesday, March 4, will open with a focus on the green energy transition and its role in enabling progress toward achieving the desired high-income economy. The next set of panels will discuss the issue of logistics, relevant trends in the finance industry, and high-performing education. Separate panels will be devoted to topical issue of large data analysis to empower public services and decision making, the true nature of global players operating in local conditions, and to the real valuation of Serbian and regional businesses when scrutinized through the lens of financial markets and companies running mergers and acquisitions.
The remainder of Day Two contains panels on traditional “middle income trap” problem, provide additional angle to discuss the opportunities of circular economy, innovations, banking sector role in economic recovery, and potential contributions by agriculture to sustainable development.
Two panels will provide an opportunity to discuss the pros and cons of the controversial Jadar project, and the novel idea of exploring business potential based on the growing number of qualified immigrants and refugees in Serbia. Day Two will conclude with a conversation with Mr. Svetislav Pešić, our renowned basketball coach and internationally recognized team and leadership building expert.
Day Three, Wednesday March 5, will start with a plenary session featuring distinguished representatives from leading institutions and organizations presenting their work programs. This will be followed by a UNICEF fundraising panel and a discussion on select cultural endowments in Serbia. Two concluding working panels will be devoted to topical issues (generations Z and Alpha, and healthcare based on innovations -health EXPO 2027). As usual, the KBF will conclude with an address by Prime Minister Mr. Miloš Vučević, followed by closing remarks from the President of the SES.
* * *
The context: The 2025 Forum takes place in a continuously complex geopolitical and geo-economic situation. A prolonged “poly-crisis” we identified last year is coming from even more sources and encompasses a variety of relevant economic and social fields ranging from slow growth, war tensions, inflation, disruption of supply chains, fragmentation and slowdown of world trade, declining real incomes, growing inequalities, and delayed green agenda. It requires nuanced diagnostics and a carefully balanced mix of possible policy and structural interventions, taking into account regional and country circumstances.
The world entered 2024 with considerable anxiety regarding the prospect of “slow growth and high inflation”. Once global inflation declined as a result of decisive monetary policy action, easing supply chain constraints, and declining pressures from (external and domestic) food and energy prices, the return to long-run price stability seemed well within reach. Equally important, the taming of complex inflation pressures has been achieved without pushing the global economy into recession.
Although rolling back inflation have been a remarkable successes, reviving economic growth and restoring real incomes have not. Elevated prices, reduced real incomes and rising debt levels caused by years of fiscal expansion are a clear proof of that. Despite demonstrated strong resilience, the resulting mild growth recovery might not suffice to meet increasing external public debt service needs and rebuild essential fiscal buffers.
Predictably, following a period of exceptional fiscal expansion during a series of crises triggered by the pandemic and economic consequences of wars, there is a need to both restore fiscal buffers and secure priority investment to keep up with the competing countries. With weak economic growth and growing cost of public debt (i.e. high interest payments), the necessary fiscal space is under heavy pressure to deliver on multiple fronts under a perfect storm made of “high public debt, high interest rates, and low growth.”
The “economic growth” part of the puzzle is not likely to be resolved any time soon. Main contributions to global growth from China and India are likely to slowly decline in the medium run. The US contribution is expected to remain constant, while EU’s (otherwise small) addition is projected to increase, albeit marginally. That leaves a considerably reduced fiscal space for expenditures on public services (education, health), traditional infrastructure, and modern investment in green technology and digital economy. To make things worse, the existing wars and elevated geo-stability risks will make additional priority claims on limited fiscal space for military expenditures.
As a result, there will be a tendency to reduce development assistance due to general budgetary restrictions and the growing overall uncertainty, and to translate security concerns into protectionism and trade fragmentation. Many countries are already resorting to industrial policy which in reality results in a series of trade restrictions increasing at an alarming rate. For the first time in two decades trade now grows slower than GDP. Instead of being an important driver of growth, it now lags behind economic growth.
Policy priorities: To restore resilience in 2025 and beyond, countries must reduce debt burden and rebuild fiscal buffers. Budgets need to be scrutinized and aligned with true priorities, albeit gradually to avoid downward pressure on growth and real incomes. On the revenue side, the main hurdle is to politically commit to efficient measures aimed at expanding the tax base, improving tax administration, and reducing shadow economy and corruption. On the expenditure side, it is critical to prioritize and closely monitor spending approved through a broad public consensus.
Fiscal reforms are not easy, but they are necessary to restart the engines of growth, create jobs, raise additional tax revenues, create fiscal space, and secure debt sustainability. Key reforms that could remove obstacles to growth include:
• Achieve greater mobility in labor markets to meet the challenges of new technologies;
• Mobilize capital from international and domestic sources;
• Enhance productivity of all factors through improved governance and institutions, and greater investment in education, R&D, training and reskilling services;
• Restore efficient trade flows;
• Manage climate change and green transition; and
• Harness AI as general purpose technology for augmenting the productivity of existing jobs as well as enabling automation where justified by relocating labor to higher productivity jobs.
World: Resilient Global Economy Still Trails Pre-pandemic Performance
The global economy continues to recover slowly from the pandemic and the shocks of wars in Ukraine and the Middle East, but slower than expected and it still lags behind pre-crisis levels. In retrospect, the resilience of the global economy through 2024 has been remarkable. Heavy disruptions in energy, commodity and food markets caused by the war, and monetary tightening had slowed economic growth. It prevented the expected return to the pre-crisis growth dynamics, but it did not cause global recession.
Serious growth and macroeconomic stability challenges still lie ahead. Global economic activity bottomed out at the end of 2022, but full recovery to pre-pandemic levels of GDP and price stability still remains out of reach. This is particularly true for emerging and developing countries. Based on the IMF’s October 2024 projections, global GDP growth slowed from 3.3 percent recorded in 2023 to 3.2 percent this year, and in 2025, which remains well below the 3.8 percent historical average recorded during 2000-2019 period.
The advanced economies are expected to marginally improve from 1.7 percent growth in 2023 to 1.8 percent in 2024 and retain the same dynamic in 2025. The estimates 2024 reflect stronger growth dynamics in the US (2.8 percent) and weaker expected growth in the EU. The opposite is true for the 2025 forecast: the US economy is expected to grow slower (2.2 percent) and other advanced economies are expected to perform better (Germany up from no growth in 2024 to 0.8 percent in 2025, and Japan up from 0.3 to 1.1 percent).
Emerging market and developing economies are projected to have a marginally lower GDP growth in 2024 and 2025 (4.2 percent) compared to 4.4 percent achieved in 2023, reflecting both global disruptions and continued structural problems in China.
Mediocre Medium-Term Growth Prospects: International financial and development institutions and more than 100 private and public economic forecasting institutions continue to be pessimistic about the medium-term growth prospects and project the lowest GDP dynamic in decades with adverse prospects for higher living standards and income convergence towards advanced countries.
The latest World Economic Outlook (WEO) forecasts global growth in 2029 at 3.1 percent, compared to 3.6 percent medium-term growth expected in early 2020 just before the pandemic, and 4.9 percent projected before the onset of the global financial crisis in 2008. Medium-term forecast for advanced economies stands at 1.7 percent GDP growth in 2029, and 3.9 percent for emerging and developing economies. Per capita growth projections for advanced economies follow the same declining pattern. This confirms that declining population is not the cause of slower growth, but rather lower capital accumulation per worker, slower total factor productivity growth and slowdown in labor force participation in advanced economies.
Weaker growth prospects are likely to adversely affect income convergence across economies, and make it more difficult to build and sustain fiscal buffers needed to respond to challenges posed by the shock-prone world and attract (crowd in) the much-needed investments.
Overall, based on current policies and structural weaknesses, a full recovery of global output to full pre-pandemic level does not seem very likely in the medium term. The latest medium-term projections still imply a global output loss of some 5.0 percent of GDP.
Although path to price stability may still be uneven, global headline inflation is projected to decrease further, from an average of 6.7 percent in 2023 to 5.8 percent in 2024 and 4.3 percent in 2025 in the baseline scenario. Disinflation is expected to be faster in advanced economies with a decline of 2 percentage points from 2023 to 2024, followed by stabilization at about 2 percent in 2025 and beyond. In emerging market and developing economies inflation is projected to decline from 8.1 percent in 2023 to 7.9 percent in 2024 and then then drop to 5.9 percent in 2025.
These projections continue to be consistent with a “soft landing” scenario which relies on moderated disinflation policies that do not cause a strong downturn in economic activity and an increase in unemployment – i.e. do not give rise to recessionary dynamics.
Medium-Term Low Growth Outlook: Without the necessary deep structural reforms medium-term output growth is likely to remain weak despite a possible expansionary monetary policy stance. A simple test indicating that five-year growth prospects appear weaker than next year growth confirm that. The reason is the presence of structural issues and constraints to growth in the medium-term including population aging, weak investment motivation and low total factor productivity growth.
These factors are some of the important underlying drivers of recent productivity divergence between the United States and the euro area in addition to limited market size (i.e. the failure of the EU to truly integrate markets), more limited access to finance and risk averse attitude towards business investment in high tech industries, and presence of barriers to trade and economic activity. The recent Draghi report provides a detailed set of diagnostics for the EU and connected economies. More importantly, it calls for action in removing administrative and process barriers to economic activity.
Risks going forward are tilted on the downside: While some of the extreme risks—such as severe banking instability—have moderated since April, the balance remains tilted to the downside.
First, the real estate crisis in China is not over and represent an important risk for the global economy. Second, geopolitical tensions and disruptions related to climate change are still there and could trigger new volatility of commodity prices with adverse consequences on economic growth, inflation, financial stability and investor confidence. Third, while both headline and underlying core inflation have decreased, they remain uncomfortably high. Near-term inflation expectations have risen markedly above target. Bringing these near-term inflation expectations back down below target is of paramount importance in taming inflation.
Fourth, fiscal buffers have been eroded (or depleted) in many countries due to fiscal interventions during the pandemic and ensuing slower growth. With elevated debt levels, rising funding costs, slowing growth, and a gap between the growing demands on the state services and available fiscal resources, there is an acute need to rebuild fiscal buffers.
Fifth, despite the tight monetary policy, financial conditions have eased in many countries. Unless properly managed, this could trigger a sharp repricing of risk, especially for emerging markets, that would appreciate further the US dollar, trigger capital outflows, and increase borrowing costs and debt distress.
Policy implications: Some of the adverse risks have gained more prominence. Monetary policy tightening motivated by inflation fears turned out to be overly tight for economic recovery, now more through consumer and business sentiment regarding real estate and business investment. Another drag factor may come from financial market repricing following monetary policy reassessments.
As the global economy approaches the final stage of big disinflation, the underlying remnants of inflation (especially inflation expectations) proves more persistent than expected. This weakens consumer and business confidence, fuels market repricing, tightens financial conditions, and slows down the pace of economic recovery. As a result, financial market turbulence could flare up prompting price corrections and fueling contagion effects undermining hard won financial stability.
Government interventions must be carefully measured as front-loaded fiscal consolidation could precipitate an economic downturn amid a fragile recovery. On the other extreme, stimulus to counter weakness in domestic demand could place further strain on public finances. Finally, subsidies and/or restraints in certain sectors intended boost exports, could further fragment trade flows and exacerbate trade tensions.
Once smooth landing is secured, policy priorities need to switch from restoring price stability to rebuilding fiscal buffers. As central banks adopt a less restrictive monetary stance, a renewed emphasis on medium-term fiscal consolidation is urgently needed to restore fiscal and budgetary flexibility, secure funding for priority investments, and ensure long-term debt sustainability.
Central banks must be ready to ease monetary policy, while carefully monitoring actual inflation and inflationary expectations to ensure continuous support to growth, creation of new jobs and ability to service debt, as well as restore macro-prudential buffers and ensure overall financial stability. For many countries, ensuring debt sustainability is an equally important parallel task.
Europe
Europe continues to faces two challenges: First, taming the inflation pressures and restoring price stability; and second securing strong, sustainable green growth in the longer run while managing the impact of geo-economic fragmentation.
Global shifts resulting in geo-economic fragmentation and the impact of climate change have exacerbated the long-standing growth problems and could erode Europe’s competitiveness globally, as well as slow or even stalled income convergence within the EU and in all of Europe.
Cooling headline inflation is providing some relief to households and firms. Easing commodity prices and supply constraints have been mainly responsible, but persistent core inflation has proved more difficult to tackle.
ECB and Central banks across Europe have tightened monetary policies substantially, and governments have started scaling back fiscal support. The lingering effects of last year’s energy price shocks and tighter macro policies are also contributing to a growth slowdown this year.
Overall, Europe’s growth forecast is shaped by the opposing forces of tighter macroeconomic policies and the gradual recovery in real incomes, as inflation falls and wages rise. The outlook for Europe predicts soft landing, with inflation declining gradually and growth slowly recovering. Based on official EU sources,
the European economy is expected to gradually recover and experience modest growth in the coming years. EU GDP growth is projected to be 0.9 percent in 2024, improving to 1.5 percent in 2025, with Euro Area numbers slightly below (0.8 and 1.3 percent respectively). These projections indicate a gradual economic recovery driven by increased consumer spending, higher wages, and new jobs.
Within the advanced European economies, countries with larger manufacturing or energy-intensive sectors slowed down more and experience slower recovery than economies that rely more on services and tourism. In addition, Germany and other countries with large manufacturing sectors also face low external demand and both direct and indirect effects of geo-economic fragmentation.
Similarly, European emerging market economies will experience a mild recovery in 2024-2025, but the extent will vary across countries depending on the energy intensity of production, service sector orientation, and disruption of trade flows caused by the Russian invasion of Ukraine.
However, the outlook remains uncertain due to ongoing geopolitical risks and economic challenges related to lagging structural reforms. More specifically, the European economy faces several significant challenges that could impact growth in 2025 and beyond.
• Geopolitical risks related to ongoing conflicts in Ukraine and tensions in the Middle East can disrupt trade and energy supplies.
• Subdued inflation pressures and high interest rates are negatively affecting investments and consumer spending.
• Uncertain energy supply and high prices continue to pose a challenge, particularly for energy-intensive industries important for output growth and exports.
• High public and private debt constrains the ability of governments and businesses to invest in new growth initiatives.
• Persistent weak productivity growth, partly due to perception of risks, limited business dynamism and structural issues, hampers long-term economic potential.
These challenges require careful management and strategic policy responses to ensure sustainable growth. Particularly in managing the recovery of German economy from the past shocks.
According to the latest forecasts, Germany’s economic growth prospects for 2024 are quite modest since the economy is expected to contract by 0.1 percent. The German economy is expected to contract by 0.1% in 2024 following a 0.3% decline in 2023. However, there are signs of a gradual recovery starting in 2025, with GDP growth projected to reach 0.7% and further improve to 1.3% in 2026.
As already mentioned, in the presence of existing challenges and constraints (high energy cost, weak external demand, ongoing geopolitical uncertainties, and, most importantly, lagging structural reforms at home) the initial recovery is expected to be driven by increases in real wages, which should boost domestic demand, and a rebound in investment, particularly in the construction and industrial sectors.
In addition, the recovery in 2025 and beyond will be driven by the resumption of exports, construction sector (both in housing and infrastructure), and most importantly by investment in green technology and digital infrastructure.
Given its importance for the Western Balkans region and Serbian economy, the status and recovery options for the German auto industry are of paramount importance. German car manufacturers face several challenges, but they also have opportunities for revival and growth:
The main challenges come from:
1. Increase in global competition from the US and Asian (Chinese) automakers, especially in the market for electric (EV) and hybrid vehicles;
2. High energy costs and prevailing economic uncertainties continue to impact production and sales.
3. Technological transition to efficient production of EV and hybrid vehicles requires significant investment in new technologies, labor skills and infrastructure.
Opportunities for revival of auto industry include:
1. Government support through incentives for EV production and investments in digital infrastructure.
2. Applied innovation in EVs based on Germany leader position in automotive innovation.
3. Dormant export potential which could easily be revived for Germany to resume its position in the world market despite challenges in recent years.
4. Expert opinion addresses key underlying causes and strongly suggests that improving efficiency and productivity is crucial for the industry’s long-term competitiveness. Additionally, fostering innovation and maintaining strong government support will be key to navigating the current challenges and achieving recovery in the global markets. Overall, while the path to recovery is complex, strategic investments and policy support can help the German auto industry regain its footing.
One of the key specific challenges for German automakers will be adapting to fast changing EV trends. Several strategic initiatives are already underway:
• Specific very ambitious electrification goals by major manufacturers (Volkswagen, BMW, and Mercedes-Benz) who plan to go electric by 2030 and all electric by 2040.
• Investment in EV technology including battery development and production.
• Introduction of new EV models to cater to various consumer preferences, from luxury to more affordable options.
• Charging infrastructure development in partnerships with energy companies and investments in public charging networks to make EV ownership more convenient.
• Sustainability initiatives beyond EV production to secure renewable energy at all stages of the process.
• Managed Government support through incentives and subsidies for both manufacturers and consumers (includes tax breaks, grants for EV purchases, and funding for research and development).
Policy response: European monetary policy is approaching the end of the tightening cycle. Despite these welcome improvements in fighting inflation, full price stability (i.e. core inflation below 2 percent and low to zero inflation expectations) is not likely to be achieved and sustained before late in 2025.
Lower core inflation will be driven by subdued domestic demand and lower commodity prices. On the other hand, the pace of disinflation will be slowed by the projected recovery in real incomes and still-strong labor markets. Sustained nominal wage growth above inflation and productivity growth rates is a key risk to disinflation, especially in European emerging market economies.
With premature monetary easing, real wage increases and insufficient fiscal consolidation, inflation could become entrenched, requiring additional policy tightening and potentially leading to stagflation.
Europe is facing these combined risks at a time when structural shifts from geopolitical and geo-economic fragmentation and climate change are compounding already-existing long-term growth problems.
Europe’s medium-term growth prospects have declined for some time, with weakening productivity growth as the key factor. The new challenges of higher and more volatile energy costs, disruptions in trade relationships and production value chains combined with well-known old constraints (of population aging and inadequate labor supply) can stall potential growth. Weak productivity and loss of wage-cost competitiveness may undermine stability and economic convergence as the main motivational factors (“the European dream”) for most European emerging market economies.
It is, therefore, crucial to sustain economic policies aimed at restoring price stability and strengthen economic fundamentals. Empirical evidence suggests it takes several years for inflation to return to normal levels after an inflationary episode. Maintaining a restrictive monetary policy stance is thus paramount to securing the return of inflation to target within a reasonable timeframe. Uncertainty about inflation persistence is large, and the cost of easing too early is substantial.
Monetary policy should be adjusted to country circumstances, and policy rates should remain high for some time. It is essential that at the same time countries rebuild and/or preserve fiscal buffers while protecting budget expenditures aimed at meeting critical spending needs.
Untargeted energy subsidies and financing of inefficiencies should be phased out. In addition to these savings, eligible EU economies should strengthen their capacity to effectively utilize EU grants for priority spending on climate-resilient infrastructure, social protection, and green transition. The remaining spending needs on education, health, infrastructure, and climate change may have to be financed from fiscal deficits projected to increase over the medium term in most European emerging market economies.
Macro-financial policies should ensure that banks utilize their profits from rising net interest margins to raise capital buffers to absorb the shocks and headwinds in the real estate sector.
Structural policies remain crucial for achieving strong, green, and evenly distributed growth. Reforms should focus on removing barriers to economic innovation, dynamic investment and R&D which enhance competition that increases productivity.
European emerging market economies require improved public finance management and public sector governance in general.
To counter geo-economic fragmentation (GEF), Europe needs to efficient single market as its most important growth asset to countervail GEF forces, increase efficiency and productivity, and facilitate the green transition. Policies promoting these objectives must be designed carefully and deployed with surgical precision and with care to avoiding costly subsidy races or use restrictions (rationing) and distortionary protections measures (tariffs).
Western Balkans
During 2024 the WB region relied more on domestic sources of growth supported by expansionary fiscal policies, rising credit availability, and inflation pressures. In addition to increased consumption and investment on the demand side, the region experienced strong growth in construction and services on the supply side.
Economic growth during 2024 is expected to reach 3.3 percent, up from 2.6 percent in 2023. Serbia— the largest economy in the region—is projected to reach 3.8 percent GDP growth in 2024, up from 2.5 percent a year ago, driven by a recovery in private consumption and investment.
The region’s employment reached a historical high of 48.5 percent and poverty continued to fall.
After three years of consolidation, WB countries are expected to have a growing fiscal deficit in 2024 despite robust revenue performance due to high spending pressures on social benefits, pensions and wages, and increased investment expenditures. The average fiscal deficit for the region is expected to increase by 1 percent of GDP and reach 2.5 percent for the year. Performance across countries varies a great deal: Serbia is expected to retain the same deficit level and Montenegro is poised to have a fiscal surplus. Public debt is estimated to marginally increase in 2024 to 47.2 percent of GDP from 46.8 percent in 2023.
During 2024 the WB region experienced a reduction in consumer price inflation from 4.4 percent at the outset of the year to 3.2 percent in July 2024.
The region had a widening current account deficit mainly due to slow or negative (Germany) growth among its main trading partners in the EU.
Domestic consumption and investment and WB regional trade are expected to become more important sources of growth in 2025 and beyond as the EU trading partners (especially Germany) slowly recover from the crisis. The structural reform agenda remains critical to boost the growth momentum in the region for more sustainable improvements in living standards and closer economic integration. As the World Bank report on the WB region shows, the EU’s New Growth Plan for the Western Balkans offers a combination of new financing opportunities as well as early access to selected aspects of the single market within the WB region. An expansion of the geographic scope of the Single Euro Payments Area (SEPA) to some of the WB6 countries as early as 2025 would help support market integration and remove barriers to financial flows.
The opening up of “green lanes” and other measures to facilitate trade could accelerate value chain integration between the Western Balkans and the EU. Similarly, domestic market reforms to boost competition, upscale innovation and attract higher quality foreign investments could accelerate growth and job creation.
Serbia
The growth of the Serbian economy accelerated in the first half of 2024 leading to an increase in projected GDP growth for the year as whole to 4.0 percent thanks to a better-than-expected performance of the construction and services sectors. A severe drought could have had a significant negative impact on agriculture, which may still cause a downwards revision of 2024 GDP annual projections. On the expenditure side, consumption and investment were the main drivers of growth in while net exports had a negative contribution. Consumption started to recover based on continued increase in real incomes (combination of nominal income growth and lower inflation).
High volatility of agricultural production and related food industry calls for policy and structural (investment) measures to mitigate the negative impact of increasing climate shocks and to promote private sector participation.
Under medium-term baseline scenario, the Serbian economy is expected to grow at around 4 percent in 2025 and beyond. With limited space for future stimulus packages, structural reforms are needed to accelerate private sector led growth.
Recent developments: Strong GDP growth in Q1 and Q2 2024 (4.6 and 4 percent, y/y) was driven by a recovery of private sector consumption and investment. On the other hand, net exports made a negative contribution to growth in the first half of the year due to lower-than-expected exports growth, as external demand weakened, and imports remained at a high level (in part explained by increased investment).
Manufacturing remained resilient to external developments and grew 3.6 percent based on good performance of the food, tobacco, metals, electronics and automotive sectors.
Labor market indicators improved slightly with 8.2 percent unemployment rate and record high 51.4 percent employment level.
Wages increased by 14.7 percent in nominal terms (9.2 percent, in real terms). Inflation continued to gradually decline mainly due to a significant decline in food inflation.
The NBS policy rate was kept at 6.5 percent from July 2023 to June 2024 and then lowered to 5,75 percent. Budgetary revenues over-performed by 14.1 percent due to higher social insurance contributions, VAT, and excise taxes. Expenditures increased by 15.2 percent in nominal terms yielding a consolidated fiscal surplus of 0.4 percent of GDP.
Medium-term growth is projected at around 4 percent, driven primarily by consumption and investment.
Downside risks include the impact of climate change on agriculture and infrastructure.
On the upside, there could be a more significant impact of exports on growth, including private sector investment in the automotive sector.
Inflation is expected to decline gradually to the NBS target band.
Public debt increased significantly in June 2024 (by 2.1pp) to reach 52.6 percent of GDP. The current account deficit is expected to increase to 4.1 percent of GDP in 2024. Over the first half of the year the CAD already more than doubled compared to 2023. The trade balance keeps widening as well as the primary income deficit. At the same time net transfers declined marginally, although still reporting a major surplus. Net FDI has continued to perform strongly, remaining broadly unchanged in euro terms (at EUR 4,3 billion in the 11 months of 2024). Foreign currency reserves increased to a record high level of EUR 27.5 billion by June. Overall credit decreased by 1.2 percent (y/y) through June 2024. However, loans to private businesses and households were up by 7.3 percent and 4.8 percent respectively. Gross nonperforming loans declined to 2.9 percent in June 2024.
Fiscal deficit is now projected at a higher level than before since the government decided to de facto suspend fiscal rules until 2029, in the context of largescale infrastructure public spending plans.
Serbia’s economic outlook depends on geopolitical risks and energy sector developments, uncertainties over trading-partner growth (the EU and neighboring countries), resolution of efficiency and management issues in SOEs, successful taming of inflation pressures, and possible global financial market instability.
It is essential that a tight monetary policy stance is retained as long as needed and coupled with fiscal consolidation to observe deficit targets, rein in debt, rebuild fiscal buffers and sustain high level of public capital spending. Public sector wages and pensions should not be increased beyond the agreed fiscal rule. Public investment project should be evaluated based on financial and economic efficiency criteria, and managed in line with transparent public procurement rules.
Further efforts are needed to improve public financial management by advancing program budgeting and medium-term expenditure framework, better managing fiscal risks and public investment, and modernizing tax administration. One-off untargeted fiscal interventions (especially helicopter money and other politically motivated transfers) and energy subsidies should be avoided. They directly violate the principles of fiscal responsibility mentioned above and undermine the necessary joint monetary and fiscal policy efforts needed to tame inflation pressures, reverse inflationary expectations and reignite investors confidence.
A comprehensive strategy is needed to identify the main causes of slow labor and factor productivity growth and define a set of structural reforms and incentives to increase medium-term growth and convergence to EU income levels. It is important to stress that these reforms are not needed just as EU accession requirement, but represent a necessary basis for better performance and economic prosperity, a basis for sustainable green growth and true resilience to major future risks.
* * *
In conclusion, we would like to stress that the true spirit and tradition of the KBF is to promote bold ideas that can help us better understand the challenges and opportunities connected with sustainable development agenda. The aim of the KBF 2025 is to motivate all participants to understand and actively shape the emerging economic and business ecosystem striving to embark on an innovation-driven global economy based on universal mobility.
The Serbian Association of Economists, as the organizer of the KBF, strives to sustain a network of influential stakeholders from all relevant fields and structure regular interactions through debates, dialogues, and knowledge sharing. Our vision is to become a true force for a better Serbia by creating consensus on fertile and feasible ideas that could help to overcome persistent economic problems and form a foundation of a sustainable economy converging to European Union income levels and social welfare.
Again, the choice to participate in the KBF 2025 is entirely yours!
We stand ready to welcome you at the XXXII Kopaonik Business Forum! Do come.
Program Committee of the Kopaonik Business Forum
XXXII Kopaonik Business Forum
The Kopaonik Business Forum (KBF) is a high-profile event committed to improving the performance of the Serbian economy through analytical contributions and dialogue between major relevant stakeholders. For more than three decades the event attracted a significant number of participants from the region. Partnership with Mastercard company secures additional support in achieving greater visibility and enhancing the quality of this important event. Recently, the Forum has been gathering on average more than fifteen hundred participants annually, including heads of state, prime ministers and ministers, high representatives of regulatory bodies, representatives of international financial institutions, respectable scholars, diplomats, business practitioners, and media.
As usual, the event is organized through plenary sessions, panel discussions, special events, and peer-to-peer sessions. Our exceptional roster includes over two hundred speakers from academia (mostly economics, business management, and ICT), politics, finance, and business. Flagship thematic studies from IFIs will be presented again at the KBF along with new academic and policy papers by leading researchers and scholars in topical fields. The KBF continues to provide a unique opportunity for participants to meet and discuss relevant issues. The title of this year’s annual meeting is:
SERBIA 2027:
AIMING FOR A HIGH-INCOME ECONOMY
KBF 2025 is again a four-day event.
Day Zero, Sunday March 2, will focus on analyzing recent macroeconomic developments and future trends in Serbia, while providing an outlook for the Western Balkan region in the year 2025 and beyond. It will also provide an overview of the forthcoming EXPO 2027 event, feature a traditional presentation of the most recent company reputation (KBF) index results, and a brief update on the status of the Digital Serbia Initiative. In addition, the extended Day Zero agenda will include panels exploring a gender perspective on a greener revolution, as well as a panel on creating global products within start-ups and corporations.
Day One, Monday March 3, will begin with keynote addresses by the Governor of the Central Bank of Serbia and the Minister of Finance devoted to major macroeconomic (monetary and fiscal) policy developments in Serbia, followed by an address from Prof. Branko Milanović, a Special Guest Speaker of this year Forum. The afternoon block of panels will be provided as a dual-track format in order to accommodate the diverse interests of the KBF participants. Panel 8 will bring together leading diplomats and geopolitical experts to discuss the effects of wars and trade tensions on Europe and the Western Balkans. The remaining panels (9-20) will span a variety of topics including powering digital economy, supporting innovation, managing population dynamics, leveraging AI in business, agendas related to infrastructure and connectivity, as well as an agenda pertaining to the insurance industry. In addition, Day One panels will introduce the innovative business in China, and provide a platform to discuss the likelihood of achieving a high-income economy in Serbia, and managing green energy transition, which will conclude the discussions of Day One. At the end, the participants will also have the opportunity to attend an engaging discussion with Mr. Ge Jun, CEO and Chairman of Tojoy, the largest-start up and innovative business platform from China.
Day Two, Tuesday, March 4, will open with a focus on the green energy transition and its role in enabling progress toward achieving the desired high-income economy. The next set of panels will discuss the issue of logistics, relevant trends in the finance industry, and high-performing education. Separate panels will be devoted to topical issue of large data analysis to empower public services and decision making, the true nature of global players operating in local conditions, and to the real valuation of Serbian and regional businesses when scrutinized through the lens of financial markets and companies running mergers and acquisitions.
The remainder of Day Two contains panels on traditional “middle income trap” problem, provide additional angle to discuss the opportunities of circular economy, innovations, banking sector role in economic recovery, and potential contributions by agriculture to sustainable development.
Two panels will provide an opportunity to discuss the pros and cons of the controversial Jadar project, and the novel idea of exploring business potential based on the growing number of qualified immigrants and refugees in Serbia. Day Two will conclude with a conversation with Mr. Svetislav Pešić, our renowned basketball coach and internationally recognized team and leadership building expert.
Day Three, Wednesday March 5, will start with a plenary session featuring distinguished representatives from leading institutions and organizations presenting their work programs. This will be followed by a UNICEF fundraising panel and a discussion on select cultural endowments in Serbia. Two concluding working panels will be devoted to topical issues (generations Z and Alpha, and healthcare based on innovations -health EXPO 2027). As usual, the KBF will conclude with an address by Prime Minister Mr. Miloš Vučević, followed by closing remarks from the President of the SES.
* * *
The context: The 2025 Forum takes place in a continuously complex geopolitical and geo-economic situation. A prolonged “poly-crisis” we identified last year is coming from even more sources and encompasses a variety of relevant economic and social fields ranging from slow growth, war tensions, inflation, disruption of supply chains, fragmentation and slowdown of world trade, declining real incomes, growing inequalities, and delayed green agenda. It requires nuanced diagnostics and a carefully balanced mix of possible policy and structural interventions, taking into account regional and country circumstances.
The world entered 2024 with considerable anxiety regarding the prospect of “slow growth and high inflation”. Once global inflation declined as a result of decisive monetary policy action, easing supply chain constraints, and declining pressures from (external and domestic) food and energy prices, the return to long-run price stability seemed well within reach. Equally important, the taming of complex inflation pressures has been achieved without pushing the global economy into recession.
Although rolling back inflation have been a remarkable successes, reviving economic growth and restoring real incomes have not. Elevated prices, reduced real incomes and rising debt levels caused by years of fiscal expansion are a clear proof of that. Despite demonstrated strong resilience, the resulting mild growth recovery might not suffice to meet increasing external public debt service needs and rebuild essential fiscal buffers.
Predictably, following a period of exceptional fiscal expansion during a series of crises triggered by the pandemic and economic consequences of wars, there is a need to both restore fiscal buffers and secure priority investment to keep up with the competing countries. With weak economic growth and growing cost of public debt (i.e. high interest payments), the necessary fiscal space is under heavy pressure to deliver on multiple fronts under a perfect storm made of “high public debt, high interest rates, and low growth.”
The “economic growth” part of the puzzle is not likely to be resolved any time soon. Main contributions to global growth from China and India are likely to slowly decline in the medium run. The US contribution is expected to remain constant, while EU’s (otherwise small) addition is projected to increase, albeit marginally. That leaves a considerably reduced fiscal space for expenditures on public services (education, health), traditional infrastructure, and modern investment in green technology and digital economy. To make things worse, the existing wars and elevated geo-stability risks will make additional priority claims on limited fiscal space for military expenditures.
As a result, there will be a tendency to reduce development assistance due to general budgetary restrictions and the growing overall uncertainty, and to translate security concerns into protectionism and trade fragmentation. Many countries are already resorting to industrial policy which in reality results in a series of trade restrictions increasing at an alarming rate. For the first time in two decades trade now grows slower than GDP. Instead of being an important driver of growth, it now lags behind economic growth.
Policy priorities: To restore resilience in 2025 and beyond, countries must reduce debt burden and rebuild fiscal buffers. Budgets need to be scrutinized and aligned with true priorities, albeit gradually to avoid downward pressure on growth and real incomes. On the revenue side, the main hurdle is to politically commit to efficient measures aimed at expanding the tax base, improving tax administration, and reducing shadow economy and corruption. On the expenditure side, it is critical to prioritize and closely monitor spending approved through a broad public consensus.
Fiscal reforms are not easy, but they are necessary to restart the engines of growth, create jobs, raise additional tax revenues, create fiscal space, and secure debt sustainability. Key reforms that could remove obstacles to growth include:
• Achieve greater mobility in labor markets to meet the challenges of new technologies;
• Mobilize capital from international and domestic sources;
• Enhance productivity of all factors through improved governance and institutions, and greater investment in education, R&D, training and reskilling services;
• Restore efficient trade flows;
• Manage climate change and green transition; and
• Harness AI as general purpose technology for augmenting the productivity of existing jobs as well as enabling automation where justified by relocating labor to higher productivity jobs.
World: Resilient Global Economy Still Trails Pre-pandemic Performance
The global economy continues to recover slowly from the pandemic and the shocks of wars in Ukraine and the Middle East, but slower than expected and it still lags behind pre-crisis levels. In retrospect, the resilience of the global economy through 2024 has been remarkable. Heavy disruptions in energy, commodity and food markets caused by the war, and monetary tightening had slowed economic growth. It prevented the expected return to the pre-crisis growth dynamics, but it did not cause global recession.
Serious growth and macroeconomic stability challenges still lie ahead. Global economic activity bottomed out at the end of 2022, but full recovery to pre-pandemic levels of GDP and price stability still remains out of reach. This is particularly true for emerging and developing countries. Based on the IMF’s October 2024 projections, global GDP growth slowed from 3.3 percent recorded in 2023 to 3.2 percent this year, and in 2025, which remains well below the 3.8 percent historical average recorded during 2000-2019 period.
The advanced economies are expected to marginally improve from 1.7 percent growth in 2023 to 1.8 percent in 2024 and retain the same dynamic in 2025. The estimates 2024 reflect stronger growth dynamics in the US (2.8 percent) and weaker expected growth in the EU. The opposite is true for the 2025 forecast: the US economy is expected to grow slower (2.2 percent) and other advanced economies are expected to perform better (Germany up from no growth in 2024 to 0.8 percent in 2025, and Japan up from 0.3 to 1.1 percent).
Emerging market and developing economies are projected to have a marginally lower GDP growth in 2024 and 2025 (4.2 percent) compared to 4.4 percent achieved in 2023, reflecting both global disruptions and continued structural problems in China.
Mediocre Medium-Term Growth Prospects: International financial and development institutions and more than 100 private and public economic forecasting institutions continue to be pessimistic about the medium-term growth prospects and project the lowest GDP dynamic in decades with adverse prospects for higher living standards and income convergence towards advanced countries.
The latest World Economic Outlook (WEO) forecasts global growth in 2029 at 3.1 percent, compared to 3.6 percent medium-term growth expected in early 2020 just before the pandemic, and 4.9 percent projected before the onset of the global financial crisis in 2008. Medium-term forecast for advanced economies stands at 1.7 percent GDP growth in 2029, and 3.9 percent for emerging and developing economies. Per capita growth projections for advanced economies follow the same declining pattern. This confirms that declining population is not the cause of slower growth, but rather lower capital accumulation per worker, slower total factor productivity growth and slowdown in labor force participation in advanced economies.
Weaker growth prospects are likely to adversely affect income convergence across economies, and make it more difficult to build and sustain fiscal buffers needed to respond to challenges posed by the shock-prone world and attract (crowd in) the much-needed investments.
Overall, based on current policies and structural weaknesses, a full recovery of global output to full pre-pandemic level does not seem very likely in the medium term. The latest medium-term projections still imply a global output loss of some 5.0 percent of GDP.
Although path to price stability may still be uneven, global headline inflation is projected to decrease further, from an average of 6.7 percent in 2023 to 5.8 percent in 2024 and 4.3 percent in 2025 in the baseline scenario. Disinflation is expected to be faster in advanced economies with a decline of 2 percentage points from 2023 to 2024, followed by stabilization at about 2 percent in 2025 and beyond. In emerging market and developing economies inflation is projected to decline from 8.1 percent in 2023 to 7.9 percent in 2024 and then then drop to 5.9 percent in 2025.
These projections continue to be consistent with a “soft landing” scenario which relies on moderated disinflation policies that do not cause a strong downturn in economic activity and an increase in unemployment – i.e. do not give rise to recessionary dynamics.
Medium-Term Low Growth Outlook: Without the necessary deep structural reforms medium-term output growth is likely to remain weak despite a possible expansionary monetary policy stance. A simple test indicating that five-year growth prospects appear weaker than next year growth confirm that. The reason is the presence of structural issues and constraints to growth in the medium-term including population aging, weak investment motivation and low total factor productivity growth.
These factors are some of the important underlying drivers of recent productivity divergence between the United States and the euro area in addition to limited market size (i.e. the failure of the EU to truly integrate markets), more limited access to finance and risk averse attitude towards business investment in high tech industries, and presence of barriers to trade and economic activity. The recent Draghi report provides a detailed set of diagnostics for the EU and connected economies. More importantly, it calls for action in removing administrative and process barriers to economic activity.
Risks going forward are tilted on the downside: While some of the extreme risks—such as severe banking instability—have moderated since April, the balance remains tilted to the downside.
First, the real estate crisis in China is not over and represent an important risk for the global economy. Second, geopolitical tensions and disruptions related to climate change are still there and could trigger new volatility of commodity prices with adverse consequences on economic growth, inflation, financial stability and investor confidence. Third, while both headline and underlying core inflation have decreased, they remain uncomfortably high. Near-term inflation expectations have risen markedly above target. Bringing these near-term inflation expectations back down below target is of paramount importance in taming inflation.
Fourth, fiscal buffers have been eroded (or depleted) in many countries due to fiscal interventions during the pandemic and ensuing slower growth. With elevated debt levels, rising funding costs, slowing growth, and a gap between the growing demands on the state services and available fiscal resources, there is an acute need to rebuild fiscal buffers.
Fifth, despite the tight monetary policy, financial conditions have eased in many countries. Unless properly managed, this could trigger a sharp repricing of risk, especially for emerging markets, that would appreciate further the US dollar, trigger capital outflows, and increase borrowing costs and debt distress.
Policy implications: Some of the adverse risks have gained more prominence. Monetary policy tightening motivated by inflation fears turned out to be overly tight for economic recovery, now more through consumer and business sentiment regarding real estate and business investment. Another drag factor may come from financial market repricing following monetary policy reassessments.
As the global economy approaches the final stage of big disinflation, the underlying remnants of inflation (especially inflation expectations) proves more persistent than expected. This weakens consumer and business confidence, fuels market repricing, tightens financial conditions, and slows down the pace of economic recovery. As a result, financial market turbulence could flare up prompting price corrections and fueling contagion effects undermining hard won financial stability.
Government interventions must be carefully measured as front-loaded fiscal consolidation could precipitate an economic downturn amid a fragile recovery. On the other extreme, stimulus to counter weakness in domestic demand could place further strain on public finances. Finally, subsidies and/or restraints in certain sectors intended boost exports, could further fragment trade flows and exacerbate trade tensions.
Once smooth landing is secured, policy priorities need to switch from restoring price stability to rebuilding fiscal buffers. As central banks adopt a less restrictive monetary stance, a renewed emphasis on medium-term fiscal consolidation is urgently needed to restore fiscal and budgetary flexibility, secure funding for priority investments, and ensure long-term debt sustainability.
Central banks must be ready to ease monetary policy, while carefully monitoring actual inflation and inflationary expectations to ensure continuous support to growth, creation of new jobs and ability to service debt, as well as restore macro-prudential buffers and ensure overall financial stability. For many countries, ensuring debt sustainability is an equally important parallel task.
Europe
Europe continues to faces two challenges: First, taming the inflation pressures and restoring price stability; and second securing strong, sustainable green growth in the longer run while managing the impact of geo-economic fragmentation.
Global shifts resulting in geo-economic fragmentation and the impact of climate change have exacerbated the long-standing growth problems and could erode Europe’s competitiveness globally, as well as slow or even stalled income convergence within the EU and in all of Europe.
Cooling headline inflation is providing some relief to households and firms. Easing commodity prices and supply constraints have been mainly responsible, but persistent core inflation has proved more difficult to tackle.
ECB and Central banks across Europe have tightened monetary policies substantially, and governments have started scaling back fiscal support. The lingering effects of last year’s energy price shocks and tighter macro policies are also contributing to a growth slowdown this year.
Overall, Europe’s growth forecast is shaped by the opposing forces of tighter macroeconomic policies and the gradual recovery in real incomes, as inflation falls and wages rise. The outlook for Europe predicts soft landing, with inflation declining gradually and growth slowly recovering. Based on official EU sources,
the European economy is expected to gradually recover and experience modest growth in the coming years. EU GDP growth is projected to be 0.9 percent in 2024, improving to 1.5 percent in 2025, with Euro Area numbers slightly below (0.8 and 1.3 percent respectively). These projections indicate a gradual economic recovery driven by increased consumer spending, higher wages, and new jobs.
Within the advanced European economies, countries with larger manufacturing or energy-intensive sectors slowed down more and experience slower recovery than economies that rely more on services and tourism. In addition, Germany and other countries with large manufacturing sectors also face low external demand and both direct and indirect effects of geo-economic fragmentation.
Similarly, European emerging market economies will experience a mild recovery in 2024-2025, but the extent will vary across countries depending on the energy intensity of production, service sector orientation, and disruption of trade flows caused by the Russian invasion of Ukraine.
However, the outlook remains uncertain due to ongoing geopolitical risks and economic challenges related to lagging structural reforms. More specifically, the European economy faces several significant challenges that could impact growth in 2025 and beyond.
• Geopolitical risks related to ongoing conflicts in Ukraine and tensions in the Middle East can disrupt trade and energy supplies.
• Subdued inflation pressures and high interest rates are negatively affecting investments and consumer spending.
• Uncertain energy supply and high prices continue to pose a challenge, particularly for energy-intensive industries important for output growth and exports.
• High public and private debt constrains the ability of governments and businesses to invest in new growth initiatives.
• Persistent weak productivity growth, partly due to perception of risks, limited business dynamism and structural issues, hampers long-term economic potential.
These challenges require careful management and strategic policy responses to ensure sustainable growth. Particularly in managing the recovery of German economy from the past shocks.
According to the latest forecasts, Germany’s economic growth prospects for 2024 are quite modest since the economy is expected to contract by 0.1 percent. The German economy is expected to contract by 0.1% in 2024 following a 0.3% decline in 2023. However, there are signs of a gradual recovery starting in 2025, with GDP growth projected to reach 0.7% and further improve to 1.3% in 2026.
As already mentioned, in the presence of existing challenges and constraints (high energy cost, weak external demand, ongoing geopolitical uncertainties, and, most importantly, lagging structural reforms at home) the initial recovery is expected to be driven by increases in real wages, which should boost domestic demand, and a rebound in investment, particularly in the construction and industrial sectors.
In addition, the recovery in 2025 and beyond will be driven by the resumption of exports, construction sector (both in housing and infrastructure), and most importantly by investment in green technology and digital infrastructure.
Given its importance for the Western Balkans region and Serbian economy, the status and recovery options for the German auto industry are of paramount importance. German car manufacturers face several challenges, but they also have opportunities for revival and growth:
The main challenges come from:
1. Increase in global competition from the US and Asian (Chinese) automakers, especially in the market for electric (EV) and hybrid vehicles;
2. High energy costs and prevailing economic uncertainties continue to impact production and sales.
3. Technological transition to efficient production of EV and hybrid vehicles requires significant investment in new technologies, labor skills and infrastructure.
Opportunities for revival of auto industry include:
1. Government support through incentives for EV production and investments in digital infrastructure.
2. Applied innovation in EVs based on Germany leader position in automotive innovation.
3. Dormant export potential which could easily be revived for Germany to resume its position in the world market despite challenges in recent years.
4. Expert opinion addresses key underlying causes and strongly suggests that improving efficiency and productivity is crucial for the industry’s long-term competitiveness. Additionally, fostering innovation and maintaining strong government support will be key to navigating the current challenges and achieving recovery in the global markets. Overall, while the path to recovery is complex, strategic investments and policy support can help the German auto industry regain its footing.
One of the key specific challenges for German automakers will be adapting to fast changing EV trends. Several strategic initiatives are already underway:
• Specific very ambitious electrification goals by major manufacturers (Volkswagen, BMW, and Mercedes-Benz) who plan to go electric by 2030 and all electric by 2040.
• Investment in EV technology including battery development and production.
• Introduction of new EV models to cater to various consumer preferences, from luxury to more affordable options.
• Charging infrastructure development in partnerships with energy companies and investments in public charging networks to make EV ownership more convenient.
• Sustainability initiatives beyond EV production to secure renewable energy at all stages of the process.
• Managed Government support through incentives and subsidies for both manufacturers and consumers (includes tax breaks, grants for EV purchases, and funding for research and development).
Policy response: European monetary policy is approaching the end of the tightening cycle. Despite these welcome improvements in fighting inflation, full price stability (i.e. core inflation below 2 percent and low to zero inflation expectations) is not likely to be achieved and sustained before late in 2025.
Lower core inflation will be driven by subdued domestic demand and lower commodity prices. On the other hand, the pace of disinflation will be slowed by the projected recovery in real incomes and still-strong labor markets. Sustained nominal wage growth above inflation and productivity growth rates is a key risk to disinflation, especially in European emerging market economies.
With premature monetary easing, real wage increases and insufficient fiscal consolidation, inflation could become entrenched, requiring additional policy tightening and potentially leading to stagflation.
Europe is facing these combined risks at a time when structural shifts from geopolitical and geo-economic fragmentation and climate change are compounding already-existing long-term growth problems.
Europe’s medium-term growth prospects have declined for some time, with weakening productivity growth as the key factor. The new challenges of higher and more volatile energy costs, disruptions in trade relationships and production value chains combined with well-known old constraints (of population aging and inadequate labor supply) can stall potential growth. Weak productivity and loss of wage-cost competitiveness may undermine stability and economic convergence as the main motivational factors (“the European dream”) for most European emerging market economies.
It is, therefore, crucial to sustain economic policies aimed at restoring price stability and strengthen economic fundamentals. Empirical evidence suggests it takes several years for inflation to return to normal levels after an inflationary episode. Maintaining a restrictive monetary policy stance is thus paramount to securing the return of inflation to target within a reasonable timeframe. Uncertainty about inflation persistence is large, and the cost of easing too early is substantial.
Monetary policy should be adjusted to country circumstances, and policy rates should remain high for some time. It is essential that at the same time countries rebuild and/or preserve fiscal buffers while protecting budget expenditures aimed at meeting critical spending needs.
Untargeted energy subsidies and financing of inefficiencies should be phased out. In addition to these savings, eligible EU economies should strengthen their capacity to effectively utilize EU grants for priority spending on climate-resilient infrastructure, social protection, and green transition. The remaining spending needs on education, health, infrastructure, and climate change may have to be financed from fiscal deficits projected to increase over the medium term in most European emerging market economies.
Macro-financial policies should ensure that banks utilize their profits from rising net interest margins to raise capital buffers to absorb the shocks and headwinds in the real estate sector.
Structural policies remain crucial for achieving strong, green, and evenly distributed growth. Reforms should focus on removing barriers to economic innovation, dynamic investment and R&D which enhance competition that increases productivity.
European emerging market economies require improved public finance management and public sector governance in general.
To counter geo-economic fragmentation (GEF), Europe needs to efficient single market as its most important growth asset to countervail GEF forces, increase efficiency and productivity, and facilitate the green transition. Policies promoting these objectives must be designed carefully and deployed with surgical precision and with care to avoiding costly subsidy races or use restrictions (rationing) and distortionary protections measures (tariffs).
Western Balkans
During 2024 the WB region relied more on domestic sources of growth supported by expansionary fiscal policies, rising credit availability, and inflation pressures. In addition to increased consumption and investment on the demand side, the region experienced strong growth in construction and services on the supply side.
Economic growth during 2024 is expected to reach 3.3 percent, up from 2.6 percent in 2023. Serbia— the largest economy in the region—is projected to reach 3.8 percent GDP growth in 2024, up from 2.5 percent a year ago, driven by a recovery in private consumption and investment.
The region’s employment reached a historical high of 48.5 percent and poverty continued to fall.
After three years of consolidation, WB countries are expected to have a growing fiscal deficit in 2024 despite robust revenue performance due to high spending pressures on social benefits, pensions and wages, and increased investment expenditures. The average fiscal deficit for the region is expected to increase by 1 percent of GDP and reach 2.5 percent for the year. Performance across countries varies a great deal: Serbia is expected to retain the same deficit level and Montenegro is poised to have a fiscal surplus. Public debt is estimated to marginally increase in 2024 to 47.2 percent of GDP from 46.8 percent in 2023.
During 2024 the WB region experienced a reduction in consumer price inflation from 4.4 percent at the outset of the year to 3.2 percent in July 2024.
The region had a widening current account deficit mainly due to slow or negative (Germany) growth among its main trading partners in the EU.
Domestic consumption and investment and WB regional trade are expected to become more important sources of growth in 2025 and beyond as the EU trading partners (especially Germany) slowly recover from the crisis. The structural reform agenda remains critical to boost the growth momentum in the region for more sustainable improvements in living standards and closer economic integration. As the World Bank report on the WB region shows, the EU’s New Growth Plan for the Western Balkans offers a combination of new financing opportunities as well as early access to selected aspects of the single market within the WB region. An expansion of the geographic scope of the Single Euro Payments Area (SEPA) to some of the WB6 countries as early as 2025 would help support market integration and remove barriers to financial flows.
The opening up of “green lanes” and other measures to facilitate trade could accelerate value chain integration between the Western Balkans and the EU. Similarly, domestic market reforms to boost competition, upscale innovation and attract higher quality foreign investments could accelerate growth and job creation.
Serbia
The growth of the Serbian economy accelerated in the first half of 2024 leading to an increase in projected GDP growth for the year as whole to 4.0 percent thanks to a better-than-expected performance of the construction and services sectors. A severe drought could have had a significant negative impact on agriculture, which may still cause a downwards revision of 2024 GDP annual projections. On the expenditure side, consumption and investment were the main drivers of growth in while net exports had a negative contribution. Consumption started to recover based on continued increase in real incomes (combination of nominal income growth and lower inflation).
High volatility of agricultural production and related food industry calls for policy and structural (investment) measures to mitigate the negative impact of increasing climate shocks and to promote private sector participation.
Under medium-term baseline scenario, the Serbian economy is expected to grow at around 4 percent in 2025 and beyond. With limited space for future stimulus packages, structural reforms are needed to accelerate private sector led growth.
Recent developments: Strong GDP growth in Q1 and Q2 2024 (4.6 and 4 percent, y/y) was driven by a recovery of private sector consumption and investment. On the other hand, net exports made a negative contribution to growth in the first half of the year due to lower-than-expected exports growth, as external demand weakened, and imports remained at a high level (in part explained by increased investment).
Manufacturing remained resilient to external developments and grew 3.6 percent based on good performance of the food, tobacco, metals, electronics and automotive sectors.
Labor market indicators improved slightly with 8.2 percent unemployment rate and record high 51.4 percent employment level.
Wages increased by 14.7 percent in nominal terms (9.2 percent, in real terms). Inflation continued to gradually decline mainly due to a significant decline in food inflation.
The NBS policy rate was kept at 6.5 percent from July 2023 to June 2024 and then lowered to 5,75 percent. Budgetary revenues over-performed by 14.1 percent due to higher social insurance contributions, VAT, and excise taxes. Expenditures increased by 15.2 percent in nominal terms yielding a consolidated fiscal surplus of 0.4 percent of GDP.
Medium-term growth is projected at around 4 percent, driven primarily by consumption and investment.
Downside risks include the impact of climate change on agriculture and infrastructure.
On the upside, there could be a more significant impact of exports on growth, including private sector investment in the automotive sector.
Inflation is expected to decline gradually to the NBS target band.
Public debt increased significantly in June 2024 (by 2.1pp) to reach 52.6 percent of GDP. The current account deficit is expected to increase to 4.1 percent of GDP in 2024. Over the first half of the year the CAD already more than doubled compared to 2023. The trade balance keeps widening as well as the primary income deficit. At the same time net transfers declined marginally, although still reporting a major surplus. Net FDI has continued to perform strongly, remaining broadly unchanged in euro terms (at EUR 4,3 billion in the 11 months of 2024). Foreign currency reserves increased to a record high level of EUR 27.5 billion by June. Overall credit decreased by 1.2 percent (y/y) through June 2024. However, loans to private businesses and households were up by 7.3 percent and 4.8 percent respectively. Gross nonperforming loans declined to 2.9 percent in June 2024.
Fiscal deficit is now projected at a higher level than before since the government decided to de facto suspend fiscal rules until 2029, in the context of largescale infrastructure public spending plans.
Serbia’s economic outlook depends on geopolitical risks and energy sector developments, uncertainties over trading-partner growth (the EU and neighboring countries), resolution of efficiency and management issues in SOEs, successful taming of inflation pressures, and possible global financial market instability.
It is essential that a tight monetary policy stance is retained as long as needed and coupled with fiscal consolidation to observe deficit targets, rein in debt, rebuild fiscal buffers and sustain high level of public capital spending. Public sector wages and pensions should not be increased beyond the agreed fiscal rule. Public investment project should be evaluated based on financial and economic efficiency criteria, and managed in line with transparent public procurement rules.
Further efforts are needed to improve public financial management by advancing program budgeting and medium-term expenditure framework, better managing fiscal risks and public investment, and modernizing tax administration. One-off untargeted fiscal interventions (especially helicopter money and other politically motivated transfers) and energy subsidies should be avoided. They directly violate the principles of fiscal responsibility mentioned above and undermine the necessary joint monetary and fiscal policy efforts needed to tame inflation pressures, reverse inflationary expectations and reignite investors confidence.
A comprehensive strategy is needed to identify the main causes of slow labor and factor productivity growth and define a set of structural reforms and incentives to increase medium-term growth and convergence to EU income levels. It is important to stress that these reforms are not needed just as EU accession requirement, but represent a necessary basis for better performance and economic prosperity, a basis for sustainable green growth and true resilience to major future risks.
* * *
In conclusion, we would like to stress that the true spirit and tradition of the KBF is to promote bold ideas that can help us better understand the challenges and opportunities connected with sustainable development agenda. The aim of the KBF 2025 is to motivate all participants to understand and actively shape the emerging economic and business ecosystem striving to embark on an innovation-driven global economy based on universal mobility.
The Serbian Association of Economists, as the organizer of the KBF, strives to sustain a network of influential stakeholders from all relevant fields and structure regular interactions through debates, dialogues, and knowledge sharing. Our vision is to become a true force for a better Serbia by creating consensus on fertile and feasible ideas that could help to overcome persistent economic problems and form a foundation of a sustainable economy converging to European Union income levels and social welfare.
Again, the choice to participate in the KBF 2025 is entirely yours!
We stand ready to welcome you at the XXXII Kopaonik Business Forum! Do come.
Program Committee of the Kopaonik Business Forum
