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Serb Economy Contracted for First Time in Two Years Last Quarter

Serbia’s economy contracted for the first time in two years in the first three months of the year as bad weather and capital outflows hampered output.

Gross domestic product shrank 1.3 percent, the same as a flash estimate on April 30 and 0.6 percent growth in the final quarter of last year, the statistics office in Belgrade said today in a statement. GDP contracted 0.2 percent on a seasonally adjusted basis from the previous three months.

Serbia is trying to avoid a second recession in three years amid Europe’s debt crisis, which has damped demand in the Balkan nation’s main export markets in the European Union. The International Monetary Fund sees Serbia’s economy expanding by 0.5 percent in 2012, compared with full-year growth of 1.6 percent last year.

Economic growth this year will largely be driven by consumption, rather than net exports or investments, according to the central bank’s April economic report. The bank sees net foreign investments declining to 400 million euros ($503 million) this year from 1.8 billion euros in 2011.

The May trade deficit widened in May to 517.6 million euros from a shortfall of 455 million euros in the previous month, the statistics office said in a separate report today.

Fiscal Concerns

The central bank has urged lawmakers to lower the budget deficit and limit public debt to avoid further weakening of the dinar and give the central bank room to reduce interest rates and spur economic recovery.

President Tomislav Nikolic appointed Socialist Party leader Ivica Dacic as prime minister designate yesterday, two months after inconclusive elections left the country in political turmoil. Dacic expects to form a coalition government with Nikolic’s Progressive Party and the United Regions of Serbia party. They would hold 131 of parliament’s 250 seats.

Serbia needs to form a Cabinet quickly to ease concern over its fiscal outlook as the economy slows, according to Fitch Ratings. It also needs to resume talks with the IMF over a $1.3 billion precautionary loan suspended earlier this year when it became clear the country would slip on fiscal targets that include keeping the full-year gap within 4.25 percent of output.

The country needs cash to cover the budget deficit, which ballooned because of the economic slowdown and campaign-related spending. Serbia needs to repay about $1.5 billion in maturing dinar debt by the end of year, with a quarter of that total due next month.

The fiscal gap reached 7.3 percent in April, public debt was at 51.1 percent of gross domestic product at the end of March, exceeding the debt limit of 45 percent, and the current-account gap of 17 percent of GDP in the same three-month period, was double the planned 8.5 percent.

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