Expectations for a recovery in advanced economies are deteriorating as geopolitical instability lingers and inflation looks set to last longer than initially expected, according to the June 2022 Attica Economic Review.
In the monthly report of Attica Bank prepared in collaboration with IOBE entitled “The energy crisis is escalating, strong dynamics in tourism, amid volatility in the pandemic” it is stated that central banks are accelerating the tightening of monetary policy, aiming to align medium-term expectations close to the inflation target. Interest rate increases add to the cost of new public and private sector borrowing. Increased uncertainty is slowing new productive investment, undermining medium-term growth prospects.
Inflation and the rise in the cost of money
Among the challenges, strong and persistent inflation, the limited fiscal space of many developed economies, and the faster increase in the cost of money stand out. Private and mainly public lending rates increased in the second quarter of the year, with a gradual widening of the difference in borrowing costs (spread) between the periphery and the core of the Eurozone.
The sharp escalation of inflation for another month exacerbated domestically the effects of the war in Ukraine. But there are indications of negative effects in other areas as well. Indicatively, the Economic Climate Index declined in June, due to worsening expectations in all sectors except Construction, more strongly in Industry, as well as a decline in Consumer Confidence. In Industry, the decline came from expanding inventories and worsening orders and production forecasts, trends which reflect the effects of the war on economic activity and international trade worldwide, particularly in the Eurozone.
On the other hand, expectations in the Tourism (Hotel-Restaurants) industry were formed in June near the previous month’s multi-year high. This development is compatible with the upward trend in international airport arrivals, which in May surpassed the corresponding level of 2019, containing the current account deficit.
The challenge of worsening epidemiological data
The current worsening of epidemiological data is an additional challenge, which may cause turbulence in the economic environment. The war will remain the most determining factor of conditions in the Greek economy and internationally in the coming months, primarily through inflationary pressures and disruptions in supply chains, with an impact on the availability of raw materials and some basic goods.
Unless there is significant volatility in the health issue, the domestic economic environment will soon be significantly affected by tourism.
Effects of the increase in energy costs and countermeasures
In our country, there is a decrease in the energy deficit in the three years 2018-2020, but also a significant increase in dependence on energy goods from abroad, according to the special topic of the Attica Economic Review “Effects of the increase in energy costs and countermeasures”.
The importance of energy costs is high for branches of Industry (Food, Basic metals, Chemical products, Metal products) and Transport. Indicatively, direct energy costs refer to business expenses for petroleum products, natural gas and electricity. The indirect energy cost refers to the part of the expenditure for other productive inputs, which corresponds to the energy content of these inputs.
The indirect energy cost in some sectors exceeds the direct one (Construction, Catering – Hotels, Food, Metal products), while the energy cost (direct and indirect) is high for Basic metals, Metal Products, Chemical products and Transport ( Water and Air). These sectors are expected to be mainly affected by the rise in energy prices.
The increase in domestic production costs in certain sectors (Base metals, Metal products, PC manufacturing, etc.) in the first quarter of 2022 appears to be related, in addition to the rise in energy costs, to changes in import prices of similar products and raw material.
The main support interventions for the energy crisis include:
– electricity and natural gas consumption subsidies for households and businesses,
– compensation of 60% of additional charges to households (power pass),
– petrol and diesel consumption subsidy for natural persons (fuel pass),
– a new compensation mechanism for power plants, aiming to decouple compensation from the wholesale price of energy
You can view the entire Attica Economic Review in detail in the attached file (pdf) in the right column “Related Files”.
Source: Capital
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