The positive signals seen at the beginning of 2026 are likely to be short-lived. A new war in the Middle East will affect the Serbian economy through higher energy prices, rising business costs, and weaker foreign direct investment.
Thanks to government intervention in domestic fuel prices, the inflationary impact may be less pronounced than in some neighbouring countries, but it will still be felt. Therefore, we are revising our forecast for Serbia’s GDP growth in 2026 downwards to 2.0 per cent and raising our inflation forecast to 4.5 per cent, with the risk of significantly worse outcomes if the war in the Middle East drags on, states Branimir Jovanović in his analysis as part of the Vienna Institute for International Economic Studies’ spring forecast.
He assesses that Serbia’s economy ended 2025 weakly, as expected, but that the start of 2026 brought some more positive signals. Gross domestic product (GDP) grew by 2.2 per cent in the fourth quarter of 2025, in line with the previous three quarters and earlier projections by the Vienna Institute. Early indicators for 2026 suggest that the year began somewhat better.
“Industrial production did fall in January and February by five per cent year-on-year, but this figure should be interpreted with caution. The main reason was the temporary shutdown of NIS, the national oil company, which had been co-owned by Russia’s Gazprom Neft, following US sanctions related to Russia. As the issue has already been resolved (through the transfer of ownership to Hungary’s MOL), pressure on industrial production should ease in the coming months. Excluding this factor, the industrial picture is rosier than the headline data suggest. The automotive industry in particular continues to expand strongly, with production growth of over 50 per cent in the first two months of the year, driven mainly by the Fiat plant in Kragujevac, which has begun producing electric vehicles,” Jovanović writes.
Household demand remains relatively solid. Retail trade turnover increased by around five per cent in real terms in January and February, close to the levels seen in the second half of 2025. This is supported by continued strong growth in real wages, which reached about eight per cent in January. Real wage growth is likely to weaken in the coming months as inflation rises again, but it should remain firmly in positive territory.
“Despite rising wages, other labour market indicators are sending less encouraging signals. In the fourth quarter of 2025, the number of employed persons fell by around two per cent year-on-year, with emigration accounting for nearly half of this decline. The unemployment rate also edged up slightly to 8.9 per cent. This suggests that the economic slowdown is beginning to manifest itself in the labour market, even if wage dynamics remain strong for now,” Jovanović concludes.
Public investment is starting the year on solid footing and is likely to remain the main domestic support for growth in 2026. Infrastructure spending in January was roughly three times higher than in the same period last year. This reflects the continuation of infrastructure momentum and preparations related to EXPO, but it also follows several years of already strong public investment. In this sense, even if public infrastructure spending supports growth again in 2026, it will not be sufficient to offset other negative impacts on GDP growth.
As in 2025, the key driver of economic dynamics will be foreign direct investment (FDI), and the outlook there is not very optimistic.
“FDI inflows fell by about one-third in 2025, mainly driven by the collapse of Chinese investment, which appears to have stalled amid rising global uncertainty. It is doubtful that any improvement will occur in 2026. The war in the Middle East is raising global uncertainty to a new level, making it unlikely that Serbia will see any strong recovery in foreign investment this year,” predicts the economist from the Vienna Institute.
Inflation slowed to around 2.5 per cent in January and February, but this was largely the result of price controls introduced in autumn 2025. As these measures expired in March, price pressures are likely to re-emerge. Combined with the recent rise in global oil prices following the war in Iran, this points to a renewed acceleration of inflation in the coming months.
However, the Serbian government reacted more quickly than in some neighbouring economies. It reduced excise duties on motor fuels and capped their prices, helping to keep the increase in domestic fuel prices below 10 per cent, which is relatively low by regional standards. This should mitigate, though not prevent, the pass-through of higher global energy prices into domestic inflation.
“The war in the Middle East will affect Serbia mainly through two channels: higher production costs – rising energy prices will spill over into companies’ costs, as in 2022 – and weak investment, particularly foreign direct investment, which is already under pressure. The impact on consumption should be more limited than in some other countries in the region, both due to the government’s fuel price cap and because wage growth in Serbia remains comparatively strong.
As for fiscal policy support, no significant support measures have been announced apart from interventions in fuel prices. The fiscal deficit is expected to be around two per cent of GDP this year. Monetary policy is also unlikely to provide support: the central bank has kept its key interest rate unchanged at 5.75 per cent, and in light of new inflationary pressures, rate cuts do not appear to be on the horizon,” Jovanović assesses.
If inflation proves more persistent, the possibility of renewed tightening cannot be entirely ruled out. In this context, the Vienna Institute is revising its GDP growth forecast downwards and its inflation forecast upwards. It now expects GDP growth of 2.0 per cent in 2026, followed by 3.0 per cent in 2027 and 3.5 per cent in 2028 – which is 0.5–0.8 percentage points lower than previous projections. The main reason for the downward revision is weaker prospects for FDI. At the same time, expected inflation for 2026 stands at 4.5 per cent.
If a pessimistic scenario materialises, the situation will be worse – GDP growth in 2026 would fall to one per cent, while inflation would approach seven per cent.
“Politically, the country remains in uncertainty, but there may finally be light at the end of the tunnel. It now seems almost certain that early parliamentary elections will be held in the autumn, and the student-backed list still appears to be the favourite. In local elections held on 29 March, the ruling SNS of President Vučić won all ten municipalities, as expected, but the margin of victory was much smaller than in previous elections. The ruling SNS secured a significantly smaller share of the vote than before in eight out of ten municipalities – a clear sign that the situation is changing. Much will also depend on international developments, with events in Hungary being particularly important. The recent defeat of Viktor Orbán there may be seen as an indication that political winds in the region are shifting and could further weaken President Vučić’s position,” believes Branimir Jovanović.
(Biznis.rs, 30.04.2026)