Serbia’s early-2026 growth beats expectations, but inflation and Europe’s industrial slowdown remain key risks

Serbia is starting 2026 on a firmer footing than many expected, with first-quarter GDP growth of around 3% year-on-year—an outcome analysts describe as among the strongest in Europe for now. But the durability of that momentum is being tested by a macroeconomic reality that matters directly for households: Serbia’s inflation environment remains structurally higher than in most European economies.

Partial recovery after a softer 2025

The new quarterly figure follows a weaker 2025, when full-year economic growth slowed to roughly 2%. That slowdown was attributed to softer industrial activity, weaker European demand and disruptions tied to the regional manufacturing cycle. The first-quarter result therefore points to a partial recovery, though it still falls short of the pace seen during the post-pandemic acceleration phase.

Services lead while parts of industry lag

MAT economists said the main contributors to first-quarter growth were the services sector, trade activity and net taxes. By contrast, construction and parts of industrial production continued to lag. The divergence increasingly reflects how Serbia’s economic structure is changing: consumption, retail and services have shown more resilience than industrial and export-oriented segments that depend more heavily on wider European manufacturing demand.

Industrial rebound in March supports manufacturing data

Despite earlier weakness in industrial components, activity improved sharply in March. Industrial production rose 6.4% year-on-year and manufacturing output increased 8.4%. Part of that strength was supported by the temporary normalization of operations at the Pančevo Oil Refinery, operated by [[PRRS_LINK_2]]. Analysts noted refinery operations had a particularly strong effect on manufacturing statistics after earlier operational disruptions and maintenance cycles weighed on output earlier in the year.

Trade balance improves as exports outpace imports

External indicators also moved in a more favorable direction. Merchandise exports increased 15.4% in March, while imports rose 6.3%, narrowing Serbia’s trade deficit by more than 23% year-on-year. Export coverage of imports reached 84.5% in January–March, compared with 79.1% a year earlier—suggesting an improvement in external balance conditions even as energy imports and industrial inputs continue to exert pressure.

Fiscal performance better than planned

The fiscal picture remained relatively stable. Serbia recorded a budget deficit of approximately RSD 97.9bn during the first quarter—significantly better than planned and about RSD 80bn below the government’s original projection for the period. MAT attributed the stronger-than-expected result to resilient VAT collection, import activity and ongoing public revenue growth linked to inflation and wage increases.

Inflation remains Serbia’s central vulnerability

Even with improving growth metrics, inflation is still viewed as Serbia’s key macroeconomic risk. While much of Europe has seen clearer easing after the energy shock cycle of 2022–2024, Serbia continues to face stronger domestic price pressures driven by rising wages, food-price volatility, imported inflation and elevated service-sector costs. That keeps inflation above broader European averages and reduces room for rapid monetary easing by [[PRRS_LINK_3]].

Growth composition raises questions about sustainability

This divergence creates a more complex policy environment: Serbia is generating growth faster than many European peers, but increasingly through channels such as state-backed investment, infrastructure projects, services and public-sector spending rather than broad-based industrial expansion. At the same time, weak conditions in parts of European heavy industry continue to affect Serbia’s export manufacturing base—particularly automotive supply chains as well as metals and industrial intermediates.

Europe’s outlook will shape second-half prospects

The broader European backdrop remains uncertain as Germany faces an industrial slowdown, eurozone manufacturing demand is weaker and geopolitical uncertainty around energy markets persists. For Serbia—whose economy remains heavily integrated into European supply chains—the sustainability of its recovery may depend partly on whether European industrial demand stabilizes during the second half of 2026.

Still, the stronger first-quarter GDP figure gives Belgrade additional political and financial space ahead of major state investment plans covering transport infrastructure and energy projects, alongside preparations for EXPO 2027 Belgrade. With Serbia active in international debt markets while continuing to attract foreign industrial investment, policymakers are positioning the economy as one of Southeast Europe’s faster-growing markets despite broader continental stagnation.