Serbia’s economy expanded faster than expected in the second quarter, but stronger domestic demand is contrasting with continued weakness across significant parts of the industrial sector. GDP grew 3.8% year on year in Q2, while seasonally adjusted output increased 1.5% from the previous quarter. Growth was led by construction, services and household consumption rather than a broad-based manufacturing recovery.
Construction value added rose 9.1%, professional and administrative activities increased 5.8%, and trade, transport, accommodation and food services grew 4.4%. Household consumption advanced 4.0%, while fixed investment increased 3.3%.
Industrial output remains under pressure
Industrial production declined 2.3% year on year in July, leaving output just 0.3% higher in January-July than during the same period a year earlier. Manufacturing production fell 1.6% in July, while electricity, gas and steam output dropped 8.8%. Mining provided an exception, with production increasing 3.0%. Seasonally adjusted manufacturing output also declined 1.9% month on month, indicating that the July weakness was not solely attributable to calendar effects.
At the same time, domestic consumption remained strong. Real retail sales increased 8.2% year on year in July, bringing January-July growth to 7.3%. Average net wages rose 8.4% in real terms during the first half of the year, supporting household purchasing power.
Exports strengthen as trade deficit narrows
Foreign trade has provided additional support to the economy. Serbian goods exports reached €21.09 billion in January-July, an increase of 8.8% from a year earlier. Imports rose 4.4% to €25.50 billion, meaning exports grew faster than imports despite continued domestic consumption and investment demand. The stronger export performance consequently reduced Serbia’s merchandise trade deficit. The labour market, however, presents a different picture. The unemployment rate fell to 7.2% in Q2, while the number of employed people was 45,800 lower year on year. Meanwhile, the economically inactive population increased by 61,900, indicating that stronger wage growth has not been accompanied by equivalent employment expansion.
Public investment continues to support demand
Fiscal policy is expected to maintain support for economic activity during the autumn. Serbia’s revised 2026 budget increased the official GDP growth assumption to 3.3%, while general-government capital investment remains at around 7% of GDP. Expo 2027, transport infrastructure, railways, roads, energy networks and other major construction programmes are continuing to generate demand for engineering, materials, machinery and services. The emphasis on public investment is helping sustain sectors that have been among the strongest contributors to overall growth.
Producer prices signal rising cost pressures
Consumer inflation eased to 1.9% in July, but producer prices indicate stronger cost pressures entering the autumn. Industrial producer prices for the domestic market were 9.0% higher year on year in August, while producer prices for energy increased 19.3%.
The divergence between consumer and producer prices creates the potential for higher production costs to feed through the economy. The National Bank of Serbia (NBS) has consequently maintained its policy rate at 5.75%, despite the temporary decline in headline inflation. The central bank also has a substantial foreign-exchange buffer. Gross foreign-exchange reserves reached a record €30.50 billion at the end of July, providing capacity to support exchange-rate stability while inflation developments remain under observation.
Growth outlook remains above 3%
A base-case projection puts Serbia’s GDP growth at around 3.1%-3.4% in 2026, broadly consistent with the government’s revised 3.3% forecast The economy is therefore maintaining relatively strong growth heading into the final months of the year, supported by consumption, construction, public investment and stronger goods exports. The expansion remains uneven, with industrial production and manufacturing performing substantially more weakly than domestic-demand sectors. The combination of rapid wage growth, continued public investment and strong consumption alongside weaker industrial output is also increasing the importance of labour availability and production costs for Serbia’s subsequent growth performance.
