Alpha Bank: Recent forecasts for the economy confirm expectations for ‘type V’ recovery

The significant improvement of Greece’s development perspective in the post-pandemic landscape, has a favorable effect on the state of the country’s public finances, increasing the degrees of freedom in the exercise of fiscal policy in the coming years, Alpha Bank points out in its weekly economic bulletin.

According to him, the recent forecasts for the course of the Greek economy by both the European Commission and the Ministry of Finance in the context of the Budget, confirm the expectations for a quasi-V-shaped disorder, with the recession lasting only one year. in 2020 (-9%) and from 2021 there will be a strong recovery of economic activity.

This feature, according to Alpha Bank, differentiates the pandemic crisis from the debt crisis of the Greek economy, during which GDP change rates initially remained in negative territory for five years – although they were relatively less in comparison with 2020-, followed by a period of stagnation.

The main features of fiscal policy planning are as follows:

1. Gradual return to fiscal discipline, with a reduction in the primary deficit in 2021 and 2022 and a return to surplus in 2023.

2. Spectacular growth of GDP at constant prices, combined with the strengthening of inflation, leading to a faster growth of GDP at current prices relative to public debt, as nominal interest rates are kept relatively low, resulting in a decrease in debt to GDP ratio.

3. Significant increase in public investment compared to the past supported by the available funds of the Recovery and Sustainability Fund.

4. Redefining fiscal rules at European level, which may lead to a significant streamlining of the intensity of fiscal discipline – as determined by the level of primary surpluses – to ensure long-term sustainability, create fiscal investments.

Alpha Bank reports that the European Commission (European Economic Forecast, Autumn 2021) has revised its estimate for the growth rate for 2021, to 7.1%, from 4.3% in the summer, due to the expected strong recovery both private consumption and exports, as well as investment. The estimate for a strong recovery of economic activity from this year onwards is reflected in the final text of the 2022 Budget submitted to Parliament, as a result of which it now incorporates the revised forecast for growth of 6.9% in 2021, from 6.1% in the Preliminary Draft Budget (October 2021) and 3.6% in the Stability Program (April 2021).

2022 is expected to be a year of return in terms of economic activity higher than 2019, as the Budget predicts a further increase of 4.5%. The mix of 2022 economic growth will be significantly different from that of the current year, as it is expected to rely more on investment spending, through the implementation of the Recovery and Sustainability Fund projects and the attraction of foreign investment, due to the improved viability. of the public debt and the reduction of the country risk, as the credit surface of Greece is approaching the investment level.

According to the Budget, the implementation of projects to be funded by the Recovery and Resilience Fund is expected to contribute to the growth rate of 2022 by 2.9 percentage points, with 88% of the total distribution of grants and loans for the year to be directed to investments and 41.6% of it in public investments with a high growth footprint. The contribution of the Recovery Fund to the public reflects the evolution of the Public Investment Program (PIP), in billions of euros, from 2012 to 2022. The PAP remained relatively stable, in the period 2012-2019, however, in 2020, it showed rapidly increase to € 10.6 billion from € 5.6 billion last year – of which € 8.6 billion were co-financed projects and the remaining € 2 billion from purely national resources as a result of funding for the adverse effects of the pandemic.

In 2021 the EDP is expected to decrease to 8.35 billion euros, however it will remain increased compared to the years 2012-2019, as significant actions remain in place to address the effects of the pandemic. The contribution of the Recovery Fund to the EDP becomes visible in 2022, where the resources from the Recovery Fund are expected to increase by 3.2 billion euros the EDP, from 7.8 billion euros to 11 billion euros, achieving the highest inflow of investment over the last decade, helping to accelerate the growth of investment and – in combination with the pillar of loans to private investment projects – the beginning of the process of filling the investment gap accumulated in the magnification.

In addition, the 2022 Budget Report includes estimates of budget deficits for the two years 2021-2022, which have been revised in relation to the estimated deficits in the Preliminary Draft Budget (October 2022). The revision of the estimated growth rate for 2021, from 3.6% in April, to 6.1% in October, due to the higher-than-expected performance of the Greek economy in the second quarter of the year (with GDP growing by 16.2 % of the restrictive effect of restrictive measures on economic activity in the first quarter of the year, as well as the better-than-expected performance of the tourism industry during the summer, created additional fiscal space for support for households and businesses, with the result that the primary budget deficit, in terms of enhanced supervision, is estimated at -7.7% of GDP.

The increased consumer potential, due to the accumulation of savings during the pandemic, the further increase of investments and the faster than expected recovery of tourism, led the Ministry of Finance, as mentioned above, to further revise its forecast for a growth rate of 6%. in 2021. This contributed to the reduction of the estimate for the primary deficit of 2021, to -7.3% of GDP.

Respectively, the reduction of the forecast for the growth rate of 2022 from 6.2%, in April, to 4.5% led to an adjustment of the estimates for primary deficit, in 2022, from -0.3% to -0.9% and finally to -1.2% of GDP. The deficit reduction in 2022 is expected to come from the estimate for the rapid recovery of economic activity. Therefore, the state budget provides for 2022 increased revenues due to rising economic activity and reduced government spending to address the negative effects of the pandemic.

In addition, the 2022 Budget envisages a further contraction of the public debt-to-GDP ratio, which is expected to come primarily from the achievement of high nominal growth rates (which are currently estimated to be even higher due to inflationary pressures exercised worldwide) and secondarily by the gradual return to fiscal discipline, with the achievement of primary surpluses from 2023 onwards.

In particular, according to the Budget, the debt-to-GDP ratio is estimated to fall below 200% in 2021 (197.1%) and further in 2022, to 189.6%. The downward trend of debt, combined with its favorable characteristics (long average weighted maturity, low cost of debt service, the largest percentage of Greek debt held by creditors of the “official” sector), are expected to contribute to the faster achievement of investment grade for the indebtedness of the Greek economy, a fact which in turn is expected to contribute to the improvement of the investment climate and the attraction of foreign capital, making the country an attractive investment destination.

Any revision of the fiscal rules in force in the European Union is expected to contribute in this direction. The pandemic crisis has been the springboard for easing fiscal debt and deficit rules in order for Member States’ economies to deal effectively with the negative effects of the health crisis and the cessation of economic activity.

Greece has benefited from this initiative, the results of which are evident this year, as the country achieves a strong recovery one year after the deep recession, while at the same time supporting with significant interventions the incomes of households and businesses, significantly reducing the level of unemployment in the country (to 13% in September 2021, from 16.5% a year ago), without jeopardizing the sustainability of public debt.

The possible adoption of more flexible fiscal rules is expected on the one hand to provide the necessary space for dealing with future crises and on the other hand to contribute to the further strengthening of investments, through the utilization of the created fiscal space for the introduction of lower tax rates and promotion.

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