Serbia’s Economy Expands 3.8% as Consumption and Construction Outpace Industry

Serbia’s economic growth strengthened in the second quarter, with real GDP rising 3.8% year on year, but July data point to a widening gap between strong domestic demand and weaker industrial activity. Final figures from the Statistical Office showed quarterly growth above the earlier 3.6% flash estimate. On a seasonally adjusted basis, economic output increased 1.5% from the first quarter.

Growth was led by construction, household consumption and fixed investment. Construction expanded 9.1% year on year, household consumption increased 4.0%, while fixed investment rose 3.3%. The picture became less uniform at the start of the third quarter. Industrial production declined 2.3% in July, with manufacturing output falling 1.6% and electricity, gas and steam production dropping 8.8%. Retail activity moved in the opposite direction, with real retail sales increasing 8.2% year on year in July.

Household demand gains momentum

Consumer spending has become an increasingly important source of domestic economic activity as wages rise, employment remains relatively strong and bank lending continues to expand. In the first seven months of 2026, real retail sales grew 7.3%, reinforcing the role of household demand in the broader expansion.

Banking figures point to a similar trend. Household lending was almost 20% higher year on year at the end of August, with both cash loans and mortgages recording strong growth. The government is also providing additional support through transfers included in the revised 2026 budget, adding another source of support for household demand. The combination is favourable for retailers, service providers and banks, while also creating greater potential for inflation and import pressures as domestic consumption strengthens.

Public investment keeps construction growing

Construction has become another major contributor to economic growth, expanding 9.1% in the second quarter. Activity has been supported by Serbia’s extensive programme of roads, railways, public buildings and infrastructure connected with Expo 2027.

The revised state budget maintains capital expenditure at around 7% of GDP, keeping public investment at a high level and providing continued support for construction activity even if private industrial investment weakens. This also increases the importance of government project execution for overall economic performance. A slowdown in public investment after the current infrastructure cycle would leave greater pressure on private-sector productivity and exports to sustain comparable growth.

Manufacturing faces pressure from European industry

The 1.6% decline in manufacturing output in July provides a weaker signal for Serbia’s export-oriented industrial base. Foreign-owned factories supplying European automotive, electrical-equipment and industrial markets account for an important part of Serbia’s manufacturing and export model.

Weak conditions in Germany and restructuring among European vehicle manufacturers are putting pressure on some Serbian suppliers. Volkswagen’s cost-cutting programme, alongside wider changes in the European automotive sector, has already affected orders received by companies operating in Serbia. A prolonged difference between strong domestic demand and weaker manufacturing would affect an important source of exports, productivity and foreign direct investment.

Exports continue to exceed import growth

External trade has so far remained comparatively resilient despite the weaker industrial data. Serbian goods exports reached approximately €21.09 billion in the first seven months of 2026, an 8.8% increase from the same period a year earlier Imports rose at a slower pace, increasing 4.4% to €25.50 billion.

As a result, the trade deficit narrowed by approximately 12.6% to €4.41 billion, while export coverage of imports improved to 82.7%. The trade figures indicate that the July industrial contraction has not yet developed into a broad export decline. The performance also reflects favourable movements in import prices and exports from newer manufacturing investments. The durability of export growth will depend on how Serbian producers perform if European industrial demand remains weak.

Energy production adds to economic uncertainty

The 8.8% year-on-year decline in electricity, gas and steam output in July adds another source of pressure to the third-quarter outlook. Serbia’s electricity system remains strongly dependent on lignite and hydropower, both of which can be affected by operational conditions and weather.

Drought has reduced hydrological flexibility while the energy system is simultaneously incorporating increasing amounts of wind and solar generation. Lower domestic electricity production can directly affect economic output and increase the need for electricity imports during periods of strong demand, making energy performance an important factor for second-half growth.

Fiscal policy continues to support activity

The government has also moved toward a more expansionary fiscal position. The 2026 budget deficit target was raised from 3% to 3.5% of GDP, while public investment and household support measures remain substantial. The additional fiscal support is expected to reinforce domestic activity during the final months of the year.

The Fiscal Council, however, has questioned the need for further stimulus while economic growth is already relatively strong. The issue becomes more significant if household consumption continues expanding faster than industrial production. Fiscal measures can sustain aggregate demand, but stronger productivity and manufacturing performance remain necessary for a more durable expansion.

Industrial performance will shape the second half

The coming months will determine whether July’s manufacturing contraction represents a temporary setback or a broader weakening of industrial activity. A recovery in factories alongside continued household demand would produce a more balanced growth pattern heading into 2027. Continued industrial weakness, by contrast, would leave economic expansion increasingly dependent on construction, credit and fiscal support.

That dependence could become more important once the current public-investment cycle begins to moderate. The revised 3.8% second-quarter GDP growth rate has strengthened Serbia’s near-term economic performance, while the July figures have shifted attention toward the composition of that growth. Domestic consumption and construction are expanding rapidly, while manufacturing and energy production have weakened, creating a more uneven economic picture as the third quarter begins.