22 February 2013

Commission Winter Forecast 2013 - Greece

Greece is emerging from a tumultuous 2012 with renewed commitment and action within a strengthened economic adjustment programme that enjoys strong backing from its international lenders.

After the conclusion of a six-month review of the programme and the release of over €50 billion in December 2012, there have been some tentative signs of improvement. Banks have seen a reversal of deposit outflows and Greek  market interest rates have been reduced significantly.

The return to positive quarterly growth rates by end-2013 will be followed by positive full-year growth of 0.6 per cent in 2014. This reflects ongoing positive supply-side developments. Reductions in unit labour costs (due to far-reaching labour market reforms) and product market liberalisation are expected to create new business opportunities and to encourage job creation once the economy picks up. In addition, the bank recapitalisation process and the overall stabilisation of the country are setting the preconditions for a return of capital to the country and renewed credit flows to the private sector. With a large part of the fiscal  consolidation effort already legislated, consumers and investors appear to start regaining confidence which should strengthen domestic demand in 2014.

In 2013 the government aims at primary balance followed by a primary surplus in 2014. This is supported by a package of savings measures amounting to 7.2 per cent of GDP over 2013-14 which was adopted in November. Given interest payment reductions of almost 1 per cent due to the debt-reducing measures adopted by the Eurogroup in late 2012, the overall government deficit in 2013 is now expected to be 4.6 per cent of GDP. The structural  balance is estimated to reach a surplus of 1¾ per cent. Gross public debt is estimated at 162 per cent of GDP in  2012, 15 per cent of GDP lower than in the autumn 2012 forecast, mainly thanks to the debt buyback operation carried out in December 2012. The debt ratio is projected to increase to 176 per cent of GDP in 2013 as the economy contracts, after which it is expected to fall at an accelerated pace, supported by an improving budget balance and stronger nominal GDP growth.

On the upside, there is a distinct possibility for a stronger return of confidence and the start of the recovery earlier in 2013. This would in turn have positive spillovers on the fiscal balance. Additionally, the repayment of government arrears in 2013 and the reversal of the liquidity squeeze may have a stronger impact on private sector demand thereby offering a bigger offset to fiscal consolidation than projected. On the downside, any hesitation in programme implementation, in both the fiscal and the structural area, may deter investors and weigh on demand. Employment may respond more negatively than forecast to the depressed demand conditions expected in 2013. The one-off costs of measures related to the banking sector and tax refund arrears, whose recording is currently being assessed by statistical authorities, are expected to impact the deficit in 2012 and/or 2013, although at least part of this statistical recording would not affect programme  targets.

Full Greek forecast

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