Serb Central Bank Cuts GDP Forecast to 2% on Euro Area

Serbia’s economy will grow less than previously predicted this year because of the deteriorating economic outlook in the euro area, its key trading partner, and subdued domestic demand, the central bank said.

Gross domestic product will expand 2 percent, compared with an earlier 2.5 percent forecast, the Narodna Banka Srbije said today in its quarterly inflation report. Consumer-price growth should slow to less than 10 percent by the end of June, allowing further monetary easing, according to the report.

Policy Makers cut the GDP forecast “primarily because of the deteriorating outlook for economic recovery in the euro zone and other countries that are our foreign trade partners,” the central bank’s chief economist Branko Hinic told reporters in Belgrade, the capital.

While GDP grew a preliminary 1.9 percent from a year earlier in the first three months, snapping four quarters of annual contraction, April data showed a plunge in the rate of industrial-output growth and the steepest decline in retail sales since 2011. The central bank lowered its benchmark interest rate by a half-point to 11.25 percent on May 14, the first cut in 16 months.

The dinar, which has gained 1.3 percent against the euro this year, was little changed at 110.8750 against the common currency at 2:33 p.m. in Belgrade.

Fiscal Consolidation

Unemployment rose 4.1 percentage points from the previous quarter between January and March, bank lending shrank 0.4 percent and non-performing loans increased to 19.9 percent of the total, according to the report.

The central bank also predicted a wider 2013 current-account deficit than before, at 8.5 percent of GDP compared with 8.1 percent, reflecting a higher-than-planned fiscal gap in the year through April 30.

“We expect the government to step up the pace of fiscal consolidation,” Vice-Governor Veselin Pjescic said. Planned measures to save one percentage point of GDP “aren’t sufficient” and additional steps are needed to save at least another percentage point, he said.

The first-quarter consolidated budget gap, which includes local authorities, was 38.2 billion dinars ($445 million), while the central goverment’s shortfall was 49.8 billion dinars. The consolidated deficit is equivalent to 4.5 percent of GDP. Pjescic declined to give the government’s fiscal gap as a percentage of GDP.

The fiscal situation is “unsustainable” and the government will have to borrow more, central bank board member Stojan Stamenkovic said. While officials don’t want to cut wages and pensions, they must “at least” freeze them, he said.

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