Serbia Records 3.2% First-Quarter Growth Amid Softer Investment and Capital Inflows

Serbia’s economy expanded by 3.2% year-on-year in the first quarter of 2026, placing the country among the faster-growing economies in Europe despite a challenging regional and international environment. The latest edition of Kvartalni monitor, prepared by economists from the Faculty of Economics in Belgrade and FREN, indicates that while headline growth remained solid, underlying economic indicators present a more uneven picture across investment, industry, inflation and external financing.

The report identifies agriculture and the services sector as the principal contributors to economic growth during the quarter. Industrial production remained broadly unchanged, while construction activity declined. On the demand side, expansion was supported by private consumption, government consumption and exports, whereas investment showed little movement, indicating that the first-quarter performance was not driven by a broad-based increase in capital formation.

The composition of growth suggests that household spending and public-sector demand continued to underpin economic activity, while manufacturing investment, infrastructure execution and private-sector expansion remained comparatively subdued.

Foreign capital outflows weigh on investment outlook

Investment trends were affected by a significant change in external financing conditions during the quarter. Serbia recorded a foreign capital outflow of €866 million in the first quarter, reflecting a decline of around 40% in foreign direct investment (FDI), alongside outflows related to trade credits and portfolio investment.

The report notes that foreign capital has played a central role in Serbia’s economic model over the past decade by supporting export capacity, employment, infrastructure development and financing of the external balance. A prolonged slowdown in capital inflows would reduce investment activity, weaken future productivity growth and increase pressure on the country’s current account. While consumption-led growth continued to generate positive GDP results, the report indicates that sustained investment remains important for strengthening productive capacity and supporting longer-term economic expansion.

Inflation accelerates as monetary policy remains cautious

Inflation increased modestly after March, driven by higher energy prices and the gradual removal of administrative price controls. Government measures, including lower excise duties, interventions through commodity reserves and retail energy-price controls, moderated part of the impact from rising global energy costs. At the same time, the report highlights a gradual increase in core inflation, accompanied by stronger growth in services prices since the beginning of the year, indicating that inflationary pressures were not limited to imported energy costs.

Against that backdrop, the National Bank of Serbia maintained its monetary policy settings, leaving the reference interest rate at 5.75%, the deposit facility rate at 4.5%, and the lending facility rate at 7.0%.

The central bank’s policy stance reflects inflation remaining broadly within projected levels while continuing uncertainty surrounding energy prices, wage growth and services inflation limits the scope for monetary easing. The report also notes that the central bank continued selling foreign currency to support the Serbian dinar and contain depreciation pressures.

Labour market shows mixed trends

Household incomes continued to strengthen during the first quarter, with real wages increasing in both the public and private sectors, supporting consumer spending and domestic demand.

At the same time, labour market indicators were less robust. Employment declined, unemployment remained broadly unchanged and labour costs measured in euros increased at a faster pace. For export-oriented businesses, particularly manufacturers, higher euro-denominated labour costs could reduce competitiveness unless matched by corresponding productivity gains.

Fiscal position remains stable despite emerging risks

According to the report, fiscal policy has not become a source of macroeconomic instability, with Serbia’s public debt ratio remaining comparatively low relative to many European economies.

However, economists identified several fiscal risks, including elevated interest costs, continued challenges associated with the grey economy, weak expenditure prioritisation and inefficient allocation of public funds. The report also points to uncertainty surrounding announced pre-election spending measures, whose overall fiscal impact has yet to be determined.

Industry and infrastructure expected to support activity

The report indicates that Serbia could maintain economic growth of around 3% during 2026 if industrial activity strengthens and construction benefits from infrastructure projects linked to Expo preparations. Stellantis is expected to contribute to manufacturing output in the coming quarters, while Expo-related infrastructure projects could help reverse the decline recorded in construction during the first quarter.

The report notes that these drivers remain dependent on conditions outside Serbia, including export demand, European market performance, supply-chain stability, project execution, financing discipline and cost management.

External environment presents additional challenges

The external economic backdrop has become less supportive than during the period of strong FDI-led expansion experienced in previous years. Volatile energy prices, uneven demand across Europe, elevated financing costs and increasingly selective investor behaviour have added pressure to Serbia’s investment environment. As a result, future growth will depend not only on domestic consumption but also on the country’s ability to attract new investment and convert planned industrial and infrastructure projects into productive economic assets.

Although 3.2% first-quarter GDP growth compares favourably with many European economies, the report shows that investment remained weak, foreign capital recorded net outflows, industrial activity lacked momentum, inflation edged higher and labour market indicators did not improve at the same pace as wages. The analysis indicates that Serbia’s macroeconomic position remains stable, while emphasizing that longer-term growth will continue to depend on sustained investment, productivity improvements, export capacity and prudent fiscal management alongside consumer demand and public spending.