Op-ed: Pavle Medić
Given that GDP growth in 2025 is expected to slow to around 2.5%, with medium-term expectations closer to 3%, the government offers political instability and protests as the main explanation. This is a convenient, but unconvincing, excuse. The key causes of the slowdown were evident long before the end of 2024. Serbia is now paying the price for a short-sighted model that delivered quick results only as long as labor was abundant.
For approximately fifteen years, the model relied on three pillars. The first was export-led growth based on heavily subsidized inflows of labor-intensive foreign direct investment (FDI), often in lower value-added segments of European and Chinese value chains. The second pillar was a practically fixed nominal exchange rate against the euro. The third pillar was large infrastructure projects that boosted activity and political visibility. A fourth package, reforms that would make growth sustainable and transfer it to the domestic economy, was never adopted. There was no shift in economic policy towards productivity, strengthening domestic suppliers, competition and market discipline, education and skills, or reform of the energy sector. The outcome is not difficult to predict. Unit labor costs are rising, the dinar is appreciating in real terms, productivity is not growing, and exporters are losing price competitiveness just as Europe and global supply chains are regrouping.
The decline in competitiveness has been clearly visible in recent years. Between 2022 and 2024, labor costs per employee in manufacturing increased by about 3.5% for domestic SMEs and about 3.2% for FDI manufacturers (with an additional approximately 13.4% in 2025 for both groups). During the same period, Serbia's real effective exchange rate appreciated by about 11% in real terms (with an additional approximately 1.5% in 2025). Prices in manufacturing, as a rough indicator of how much costs can be passed on to export prices, increased by only about 2.5% between 2022 and 2024 (with an additional approximately 0.9% in 2025 for all goods, and about 1.5% for exports). Costs, therefore, rose much faster than sales prices, and the exchange rate moved in an unfavorable direction for exporters.
Wage growth is most important when viewed through its share in total costs. In manufacturing, labor is not the only cost, but its significance has increased. The share of labor costs rose from about 13% of operating expenses in 2022 to about 16% in 2024. When the 3.5% growth in labor costs per employee is weighted by the 16% share, it shows that the labor channel alone increases total unit costs by about 5% over two years. Adding the real appreciation of the exchange rate of about 11% and only 2.5% growth in manufacturing product prices makes it clear how much pressure has built up. Companies needed an approximately double-digit increase in productivity (around 13%) just to maintain margins and market position. This did not happen. A simple indicator, real income per employee (deflated by the manufacturing price index), was practically flat for domestic SMEs between 2022 and 2024, while FDI manufacturers advanced by only about 7% (largely thanks to companies that entered in 2021–2022). The gap between what was needed and what was achieved explains the loss of competitiveness without referring to events at the end of 2024.
The decline in competitiveness has already affected exports. Domestic SMEs in manufacturing had nominal revenue growth of only about 3.7% between 2022 and 2024, while exports fell by about 3.3%. The share of exports in revenue decreased from about 25.6% in 2022 to about 23.8% in 2024. FDI manufacturers continued to grow during the same period, again largely thanks to companies that entered in 2021–2022. Their exports increased by about 14.6%, and their export share rose from about 66.0% to about 68.3%. Serbia's export engine still relies heavily on FDI, while domestic SMEs are losing the race in foreign markets. This is incompatible with an economy claiming to converge with the EU.
Investment dynamics support the diagnosis. Domestic SMEs are responding to the pressure by postponing modernization, as margins and financing conditions leave no room for significant productivity leaps. In the same aggregates, the investment rate of domestic SMEs (CAPEX as a share of revenue) was around 6–7%, while for FDI manufacturers it was closer to 8–9%. At the same time, the cost of capital has sharply deteriorated: financial expenses in manufacturing increased by about 60–65% between 2022 and 2024, while aggregate EBITDA remained approximately flat. This is a combination that directly stifles productivity. Companies need new equipment, automation, skills, and process improvements, but they are facing rising labor costs, increasing interest rates, and an exchange rate that squeezes export pricing.
The most concrete evidence from the real economy is the wave of employment and capacity reductions among subsidized, labor-intensive investors. The first cracks appeared as early as the beginning of 2024, when several large investors began renegotiating obligations or reducing employment plans. Publicly announced closures and layoffs affected approximately 1,000–1,500 jobs throughout 2024. The consequences accelerated sharply in 2025: about 5,000 workers have already lost their jobs, and according to trade unions, the total number by the end of the year could rise to as many as about 9,000. Investors are certainly not pleased with political stability, but they are leaving primarily due to economic fundamentals. The picture fits at the macro level as well. Net FDI inflows in the first three quarters of 2025 were about 56% lower compared to the same period last year.
Competition from abroad is accelerating the manifestation of consequences. When European buyers talk about „North Africa“ as a production platform, they primarily mean Morocco and Tunisia. Morocco has built a complete export platform to the EU: in 2024, it produced 559,645 vehicles, while Serbia recorded only 235. The Port of Tangier Med handled about 10.24 million containers in 2024, a logistical advantage that land corridors can hardly compensate for. Moroccan automotive exports to the EU are estimated at around 15.1 billion euros in 2023. Tunisia, on the other hand, is currently a natural economic destination for labor-intensive components such as cables and textiles. Serbia's growth through FDI in similar segments is therefore directly exposed to substitution. This is not theory, but a reality of procurement where a choice is made between cheaper products and cheaper two-day sea transport to Europe, and more expensive products, transported at a higher cost, from Serbia.
The EU's energy policy and carbon footprint reduction policy are further deepening Serbia's competitiveness crisis. From 2026, CBAM will increase the real cost of carbon-intensive production, and energy reliability and emissions data will become contractual obligations in European supply chains. Serbia enters this phase with an energy sector that has not been modernized quickly and deeply enough (it is questionable whether any significant modernization can be spoken of at all), with a carbon footprint that is difficult to defend in an economy that must decarbonize, and with weak results in building a domestic industrial base. Not every plant needs to relocate; it is enough to freeze expansion, slow down hiring, and send the next contract elsewhere.
This year's protests, of course, can influence future expectations. But the channel is not the sight of citizens in the streets, but the state's response to them. Investors are not deterred by civic mobilization itself; they are deterred by signals of arbitrariness, politicized application of force and rules, as well as reputational risk which signals that the system is unpredictable. These risks amplify the existing economic pressure, but do not create it.
The conclusion is unpleasant, but simple. Serbia's slowdown is not a „story about protests.“ It is the end of export growth based on subsidies and cheap labor that never evolved into a growth strategy based on productivity. A new model would have to shift incentives towards automation and higher value-added production, strengthen and expand domestic suppliers, restore competition and market discipline, stabilize energy with decarbonization, and modernize education and skills. Without this turnaround, the country will first lose the easiest contracts, then factories, and finally more and more talent and workers.
