RS: We fine-tune our GDP forecasts

The Statistical Office has slightly cut its preliminary estimate, showing that the real GDP in the second quarter of 2024 rose by 4% year-on-year. The economy expanded by 0.8% quarter-on-quarter seasonally adjusted, indicating strong dynamics continued throughout the 1H24. The economy demonstrated a continuation of strong domestic performance, with private consumption accelerating by 4.8% year-on-year, the highest pace since early 2022, confirming improving real wage dynamics. Public spending continued to grow steadily, rising by 4.5% year-on-year. Combined, they added a total of 4 percentage points to the headline figure. Investments recorded another strong print, rising 8.5% year-on-year, largely reflecting strong construction momentum, and allowing for a 2 percentage point positive contribution. Inventories build-up also had a positive impact, adding another 1.6 percentage points to the headline figure. However, external performance again weighed on overall GDP, with exports of goods and services growth showing 4.4% year-on-year growth and being out shadowed by imports rise of 8.5% year-on-year. Overall, net exports chopped 3.6 percentage points of growth.

The pattern from 1H24 is likely to continue in the medium term. Consumption is expected to remain the main driver of GDP growth in 2024, with disinflation and double-digit nominal wage growth boosting real disposable income, while credit conditions are set to improve throughout the year as interest rates decline gradually. The government is focusing on the implementation of the "Leap into the FutureSerbia EXPO 2027" development plan, which will increase public investment spending over the period 2024-2027. The plan envisages an investment plan of hefty EUR 17.8bn over the coming years, equivalent to around 23% of estimated 2024 GDP. The program aims to raise public investment to about 7.5% of GDP by 2027 from 7% in 2023 with a significant portion allocated to transportation infrastructure. Net exports will be a drag on growth this year, as both consumption and investments are driving imports higher. Meanwhile, exports are still exposed to rather sluggish EU performance. Another drag could also come from agricultural output as long period of drought and extremely high temperatures weighed on the final crop output. Nevertheless, based on the robust early-year growth and expected acceleration of investment activity, our FY24 and FY25 GDP forecast has been upgraded by 0.2pp and 0.5pp to 4% year-on-year and 4.5% year-on-year, respectively. Overall, the risks to our forecasts seem balanced.