Her Eleftherias Kourtalis
Bank of America upgraded its estimates for growth in Greece and the Eurozone this year, due to strong tourism, while downgrading its estimates for 2023 as it predicts that the region will enter a technical recession in the fourth quarter of 2022 until the first quarter of 2023, with next year’s recovery being shallow.
In particular, he now places the growth in Greece at 4.4% in 2022 from 3% before, while at just 0.6% from 1.8% before he sees the growth of the Greek economy next year and at 2.2% in 2024. It also places inflation higher this year, at 7.8% from 7.2%, and at 4.1% in 2023 from 2.8% before, while in 2024 it will drop to 1.5%.
As he explains, although he remains negative about the eurozone’s prospects, he raises his estimate for growth this year to 3% from 2.7% before, with 30 bp. of this upgrade to be due to the strong carryover of the second quarter, i.e. strong tourism, however, he estimates that in the last quarter and for two consecutive quarters the Eurozone will enter a technical recession. It thus reduces its estimate for growth in 2023 to 0.3% from 0.9% previously and for 2024 to 1.4% from 1.6% previously. Inflation is estimated to move to 7.8% this year and to 4.7% and 1.4% in 2023 and 2024 respectively.
BofA points out that the negative output gap will likely be wider for even longer. The real income squeeze on households and firms from the energy shock is significant and, with fiscal support increasing (but remaining insufficient), excess supply over demand will persist and eventually dominate inflation dynamics. The tightening of monetary policy above neutral levels does not help this imbalance, and therefore it is estimated that the ECB will start cutting interest rates again in 2024.
Overall, BofA expects rate hikes of 150 bps. this year (75 bp in September, 50 bp in October, 25 bp in December) and three more increases of 25 bp. in 2023 (March, May, June). This means that deposit rates will be at 2.25% in June 2023.
BofA’s bearish macroeconomic scenario continues to be based on the assumption that fiscal policy support will increase. The more the shock grows, the more fiscal policy will respond. But, as before, it assumes that fiscal policy compensates for only about half of the shock.
“A ‘big package’ is reportedly in the works in Germany, but how big will it be compared to the damage from the implementation of the energy voucher this winter, the continued uncertainty in energy supply afterwards and a very large energy price shock?” , as he emphasizes. And in Europe in general, the appetite for substantial fiscal support does not seem greater, he points out. This means, on the whole, a worsening policy mix with more monetary tightening and insufficient fiscal support – hence deterioration across the GDP trajectory as well.