E.U. Commision Winter forecast - GREECE Uncertainty clouds the recovery

Greece’s economy began to grow again in the second quarter of 2014, as private consumption strengthened and net exports grew. But uncertainty on the direction of policies is affecting confidence and may dent the speed of the recovery.


Growth at risk

After six years of recession, Greece’s economy returned to growth in 2014. Real GDP increased by 0.4% y-o-y in the second quarter of 2014 and by 1.6% y-o-y in the third quarter, supported mainly by rising private consumption and the strong performance of exports, especially tourism and shipping. Investment increased in the third quarter of 2014 for the first time since 2008. 

The growth momentum was fairly firm in the second half of 2014, although the early election has affected confidence and investment. After strengthening in October and November, the Economic Sentiment Indicator fell to 98.9 in December, its lowest reading since April. 

Growth in 2014 is estimated to turn out at 1.0% y-o-y in real terms, but uncertainty is expected to weigh on growth in the first quarter of 2015.

The forecast has been prepared on the basis of the full implementation of programme commitments. On this basis, private consumption should benefit from the steep drop in oil prices and improvements in household disposable income. 

Export growth is expected to continue in 2015, on the back of the
euro’s depreciation, gains in competitiveness, and continued improvements in the business environment. Investment should grow markedly on the assumption that the political environment stabilises. Overall, real GDP is forecast to grow by 2.5% in 2015.

In 2016, real GDP growth is projected to strengthen to 3.6%, as investment is expected to gather momentum on the basis that agreed structural reforms are implemented. Greece’s current account deficit is projected to drop to 2.0% of GDP in 2014 and 1.5% in 2015 before decreasing to 0.9% in 2016. The underlying assumption is that external trade develops sustainably, supported by continued structural and institutional reforms.

After peaking in 2013, unemployment started to fall in 2014 and is expected to have dropped to 26.6%, as a result of the creation of about 100,000 new jobs in the private sector. We project the unemployment rate will fall to 25.0% in 2015 and 22.0% in 2016 as a result of sustained growth and the success of employment programmes.

Consumer prices fell by 1.4% in 2014, reflecting the fall in oil prices, lower labour costs, and the healthier competition environment in the retail, health and energy sectors. Inflation is expected to remain in negative territory in 2015 due to the continuing internal adjustment and low international oil prices, and to become positive in 2016 as the recovery gains pace.

The balance of risks points to the downside due to the uncertainty on the direction of policies, which could produce a deeper and more lasting effect on confidence, consumption and investment. 

Public finances continue to improve Greece’s overall fiscal outlook continues to strengthen. The fiscal adjustment achieved in recent years has significantly improved the fiscal balance. 

Public finances continue to improve 

Greece’s overall fiscal outlook continues to strengthen. The fiscal adjustment achieved in recent years has significantly improved the fiscal balance. In 2014, a primary balance surplus of 1.7% of GDP is forecast, based on the monthly data up to November 2014. The headline deficit - no longer impacted by the large one-off effects of bank recapitalisations recorded in 2012 and especially 2013 - is now projected to fall to 2.5% of GDP in 2014.

 Compared to the autumn forecast, the government’s fiscal balance is expected to be somewhat weaker in 2014 but stronger in 2015, as profits from the national central bank‘s holdings of Greek government bonds in 2014 (about 1.0% of GDP) are now expected to be recorded in 2015. 

The projections for 2015 and 2016 assume that Greece will meet its programme’s primary surplus targets, while the economic environment is improving and fiscal adjustment continues. To achieve the fiscal targets and complete the fifth review, further measures need to be taken on top of those foreseen in the budget adopted for 2015. If the programme targets are met, Greece should record a headline general government surplus of 1.1% and 1.6% of GDP in 2015 and 2016. The structural balance has also turned into a substantial surplus from a deep deficit in 2011. The government’s debt-to-GDP ratio is expected to stabilise in 2014, before declining markedly in 2015 and 2016, as the primary surplus continues to improve and the economy grows at a sustained rhythm. Favourable interest rates together with the back-loaded payment schedule for loans from the European Financial Stability Facility (EFSF) will help to keep interest expenditure low for a long period, despite the high stock of debt. 

Risks to the fiscal outcomes are related to a temporary deterioration of tax receipts around the turn of the year reflecting uncertainty on the implementation of the budget measures or from a stronger deceleration of the economy.