11 May 2012

Commission forecast for Greece

The closure of the competitiveness gap is expected to accelerate. Following years of continued growth, well in excess of its main trading partners, unit labour costs are now clearly declining.

The contraction in economic activity in the fourth quarter of 2011 was far deeper than expected. The quarterly accounts indicate that real GDP fell by 7.5 per cent in the last three months of 2011, compared with the same quarter of 2010. For the year as a whole, real GDP is estimated to have contracted by 6.9 per cent. In 2012, a further contraction is expected, resulting from both a significant fall in internal demand and less dynamism in exports than expected. Households' disposable income being hit by rising unemployment, cuts in private sector wages and the fiscal measures will keep domestic demand contracting. Also, unfavourable business and consumer sentiment and difficulties in access to credit for firms and households will contribute to their postponing spending decisions. The recovery, which was previously expected for this year, will be further delayed with, at best, an insignificant improvement in activity in 2013.

The 2011 general government deficit fell to 9.1 per cent of GDP from 10.3 per cent of GDP in 2010. The decline in the deficit ratio resulted from an increase in the revenue-to-GDP ratio of 1.2 pps, while the primary expenditure ratio as a share of GDP fell by 1.4 pps. The increase in interest expenditure of more than 1 pp. means that the improvement in the primary deficit was almost 2½ pps. The general government consolidated gross debt in 2011 was above 165 per cent of GDP, up from 145 per cent of GDP in 2010.

In 2012 the general government deficit is projected at 7.3 per cent of GDP, which is consistent with a target for the primary deficit of 1 per cent of GDP. To achieve this objective, the Government adopted cuts in expenditure of 1.5 per cent of GDP in the first quarter. The Government aims at achieving a primary surplus of 1.8 per cent of GDP in 2013. Based on current projections, this would require additional expenditure savings of 3.8 per cent of GDP to be identified in coming months.

The implementation of the debt exchange (private sector involvement or PSI) will help to put Greek public finances back on a sustainable path. However, given the sluggish economy, the debt ratio will only start to decline in a sustainable manner after 2013.

Full forecast (Greece)

© European Commission