Serbia: Resilience meets a harder environment

Taking into account solid 1Q26 performance and solid April data, we revised FY26 growth up by 0.3pp to 2.9% y/y, while leaving the 2027 forecast unchanged at 4% y/y. We expect consumption will remain supported by strong wage gains and tightening labourmarket. Expo related construction pipeline should lead to moderate investment growth while exports are showing better than expected performance due to solid automotive production in the Stelantisfactory. Inventories, while currently a drag on growth, could reverse once the NIS situation resolves in 2H26 and stock rebuilding phase begins.

Inflation worries are not purely energy related. Core inflation rose to 4.4% y/y in April, confirming that services, wages and domestic demand are keeping non-tradable inflation sticky independent of energy. We expect this year’s average inflation to land close to 4% y/y, while next year, due to prolonged second round effects, low base for 1Q26 and Expo related service price pressure, we see even slightly higher average CPI.

The NBS Executive Board held the key policy rate at 5.75% through March, April and May, alongside the deposit (4.5%) and lending (7.0%) facility rates. The Board continues to argue that inflation should remain within the 3% ±1.5pp band over the medium term, while explicitly acknowledging that higher world oil and energy prices will lift domestic fuel prices. In our read, the bar for near-term easing has risen after the release of 1Q26 GDP data.

Fiscally, Serbia still looks solid in the near term, but the list of claims on its fiscal space has lengthened. Pre-election spending temptations, Expo-related capex, and the potential cost of energy-sector intervention. The political environment has become a bigger factor now with early elections confirmed for the autumn. The asymmetry we warned about is in play, since it is far easier to add one-off support, accelerate wage and pension measures, or widen subsidies than to claw them back within-year. Our baseline still aligns with the authorities’ framework meaning deficits around 3% of GDP in 2026 and 2027 with broadly stable debt.

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