activity. economic activity is expected to increase in the upcoming quarters and reach roughly 0. 5 % for the entire year 2012. over the short run, increased government expenditure in the first half of the year exerts some positive contribution to domestic demand. but, euro area recession and dented economic growth of serbia ’ s other foreign trade partners will reflect negatively on demand for serbian products and the inflow of fdi in the course of this year. despite this, past and current investments in export branches of industry, primarily in the automotive industry, will lead to increased production and exports from the second half of the current year. past weakening of the dinar will also give impetus to exports growth. in view of high unemployment and modest economic growth, final consumption is expected to contract this year as well. coupled with a fall in investment demand and past weakening of the dinar, this will probably result in lower imports in 2012. with production picking up in the mostly export - oriented automotive industry, a more palpable growth of the serbian economy of 3 % could be expected in 2013. this, however, will largely hinge on the speed of the global economic recovery. growth may turn out slower than anticipated in case stricter fiscal consolidation measures are applied. in our view, however, application of stricter consolidation measures is desirable as it would contribute to macroeconomic stability, public debt sustainability, lowering of the country risk and, consequently, of the cost of borrowing, all of which would have a positive long - term impact on the economic activity in serbia. we wish to underline again that sustainability of economic growth in serbia is more important than its pace, which assumes further shifting of the sources of growth from domestic final consumption towards net exports and investments, primarily into export - oriented industries. * * * bis central bankers ’ speeches inflation has been on a steady decline throughout the last year, mostly as a result of weakening cost - push pressures on food prices, low aggregate demand and restrictive monetary policy measures applied at times of strongest inflationary pressures. the fall in year - on - year inflation was particularly pronounced in the first months of the year, as substantial price hikes from early 2011 dropped out from the calculation. inflation thus fell from 7. 0 % in december to 3. 2 % at the end of the first quarter and to 2. 7 % in april 2012, which is the lowest year - on - year inflation rate since records are available beginning in 1980. this is also slightly below the lower

challenging. growth forecasts for the euro area for the current year remain negative, while countries in the region face muted growth prospects. nonetheless, serbia ’ s country risk premium has declined, as a result of the easing of the euro area sovereign debt crisis and expansionary measures taken by the european central bank, the eu ’ s positive decision on serbia ’ s candidate status, and affirmation of the country ’ s credit rating. in fact, looking at the region, the sharpest fall in embi this year was registered for serbia. the dinar nonetheless weakened against the euro. depreciation pressures were driven by several factors : increased energy imports due to cold weather, lower exports, departure of the private owner from the smederevo steel plant, postponed review of the arrangement with the international monetary fund, increased government spending, and reduced capital inflow. bis central bankers ’ speeches * * * together with a spell of extremely cold weather in february, recessionary trends in the euro area and sluggish growth of the regional economies have led to a contraction in serbia ’ s economic activity in early 2012. according to preliminary estimates for the first quarter, gross domestic product fell by 0. 5 % from the previous quarter and by 1. 3 % from the same period last year. unfavourable weather conditions in february strained and even restricted electricity supply to a large number of enterprises. together with the suspension of operations of the smederevo steel plant, this pushed manufacturing down by as much as 12 %. however, as the production not only normalised in march, but also compensated in part for what was missed in february, manufacturing picked up by 19 %. the same factors had a decisive impact on exports, which followed a pattern similar to that of manufacturing in the first three months of 2012, while recording a mild fall at quarterly level. the steepest drop in exports was registered for base metals, chemicals and chemical products, while exports of agricultural products and electrical equipment increased. cold weather prompted an increase in imports of energy, and thereby, intermediate goods, pushing overall imports higher. on the other hand, imports of equipment and consumer goods recorded a decline. economic activity contracted in the first quarter. the negative contribution came from net exports, as well as lower private sector investment, signalled by a dip in imports of equipment and reduced construction activity, and adverse weather conditions. conversely, an upturn in retail trade points to a positive, though modest, contribution of household consumption to economic