Serbia’s 3.8% year-on-year GDP growth in the second quarter is increasingly being driven by household spending, investment and a concentrated group of export-oriented industries, as overall industrial production remains subdued.
Manufacturing continues to play an important role in exports and foreign investment, but the current expansion is also being supported by household consumption, large-scale investment and strong performance in selected export industries. GDP growth in Q2 included a 4.0% increase in household consumption, 3.3% growth in fixed investment and a 9.1% expansion in construction value added.
Capital goods lead an uneven industrial expansion
The broader industrial data point to a more differentiated manufacturing structure. Industrial production increased only 0.3% in January-July, while manufacturing output declined 1.6% year on year in July. Capital-goods production, however, rose 10.9% during January-July. Motor-vehicle output increased 44.3%, electrical equipment grew 11.3%, and machinery production expanded by almost 10%.
Other manufacturing segments performed considerably worse. Basic metals declined 12.5%, clothing fell by double digits, fabricated metal products weakened and consumer durables dropped 12.6%. The result is not a retreat from industry but a more concentrated industrial structure, in which a smaller number of capital-intensive and export-oriented plants are generating significant gains while parts of the established manufacturing base remain under pressure.
Exports benefit from stronger industrial performers
The shift is also reflected in Serbia’s foreign trade. Goods exports increased 8.8% in euro terms during January-July, compared with a 4.4% rise in imports. The faster export growth reduced the merchandise trade deficit despite strong domestic demand. Household consumption represents another major source of expansion. Real retail turnover increased 7.3% in January-July, supported by 8.4% real wage growth during the first half of the year and rapid household lending. This stronger domestic demand reduces the economy’s short-term dependence on European industrial demand as a source of growth.
Investment and construction extend the growth cycle
Public and private investment form a third major component of the current expansion. Government capital expenditure is budgeted at approximately 7% of GDP, with Expo 2027, transport networks, energy infrastructure and urban development creating a project pipeline extending into 2027. Construction value added increased by about 9% in real terms in Q2, adding another channel through which investment is feeding into economic activity. Together, consumption, investment and export performance are supporting growth of around 3% or somewhat above, even while significant parts of traditional industry remain subdued.
Labour supply becomes a growing constraint
The changing growth structure is also taking place alongside weaker labour-market participation. Serbia’s unemployment rate fell to 7.2% in Q2, but employment declined by 45,800 people year on year, while labour-force participation weakened. This shifts the constraint on economic expansion increasingly towards labour availability and productivity rather than unemployment. Higher wages support household consumption and living standards, while companies whose productivity does not increase at a comparable pace face greater competitiveness pressures.
Rising producer prices add to business costs
The cost environment is also becoming more challenging. Domestic industrial producer prices increased 9.0% year on year in August, compared with 1.9% consumer inflation in July. Serbia nevertheless enters this phase with substantial economic buffers. Public debt remains moderate, the revised budget assumes 3.3% growth in 2026, foreign-exchange reserves exceed €30 billion, the exchange rate remains stable and the banking sector continues to finance households and companies. The base growth outlook for 2026 is approximately 3.1%-3.4%, with another acceleration possible if European demand improves and the investment programme remains on schedule.
The longer-term development of the current model will depend on the period after the construction cycle, including whether infrastructure investment translates into higher productivity, whether automotive and electrical-equipment clusters develop deeper domestic supplier networks, and whether investment increasingly moves towards technology, energy and higher-value manufacturing. Without those developments, growth could become more dependent on household spending, state-supported investment and a relatively small group of foreign-owned industrial companies.
