BoG: Reduces estimates for 2022 growth to 3.2%

The Bank of Greece revises downwards its estimates for the growth rate of the Greek economy. According to the report on Monetary Policy 2021-2022, which was submitted today to the Speaker of Parliament and the Council of Ministers, according to the latest forecasts of the basic scenario of the Bank of Greece, the growth rate of the Greek economy in 2022 is expected to be at 3.2%, revised downwards from the forecast (3.8%) published in the Governor’s Report in April 2022. The revision, as reported, reflects the further increase in uncertainty in the economy due to the ongoing war between Russia and Ukraine, and rising costs and prices in general.

According to the report, the economic growth forecasts of the baseline scenario could reach higher than 3.2% if the strong growth rate of the first quarter continues in the next quarters of the year. However, the risks outweigh the positives. Risks are the further escalation of geopolitical instability, the deterioration of the international economic climate, the disruption of energy supply and the consequent further increase in its prices.

In 2023 the growth rate is expected to accelerate to 4.1%, while for 2024 it is estimated to be relatively high at 3.6%, provided that the geopolitical crisis will escalate by the end of 2022 and that energy prices will decrease.

In the BoG baseline scenario, consumer spending is expected to continue to grow in 2022, but at a much slower pace than last year, due to lower real disposable income and increased uncertainty. In the coming years, consumer spending will grow slightly higher, boosted by the expected increase in employment, as well as the decline in high savings in recent years, mainly due to the postponement of spending during the pandemic.

Investments are expected to grow rapidly throughout the 2022-2024 forecast period, aided by high liquidity in the banking sector and the utilization of available European resources.

At 80% of 2019 the tourist receipts this year

Exports of goods showed resilience during the pandemic and are estimated to increase at a satisfactory rate in the period 2022-2024. Exports of services are estimated to move upwards. Travel receipts in 2022 are expected to be around 80% of receipts in 2019, while the period 2023-2024 will follow an upward trend. Finally, maritime revenue is expected to continue its upward trend due to the strong fare market. At the same time, however, imports are expected to increase, as a result of the stimulation of domestic demand, especially investments.

Inflation 7.6% in 2022

Inflation, based on the harmonized index of consumer prices, is expected to reach 7.6% in 2022, mainly due to the upward trend of energy goods, but also the rise in food prices, while it will de-escalate in 2023 and further in 2024. The core Inflation will also be high in 2022 and, although it will escalate in 2023 and 2024, it will remain relatively high, even exceeding the general index, due to the gradual integration of the strong inflationary pressures of 2022 into the core.

The forecast for economic activity is subject to uncertainties and risks

As the BoG emphasizes, the growth rate of the Greek economy may slow down further in the event of (a) further escalation of the war in Ukraine, as this will lead to further increase in uncertainty and stronger and more persistent inflationary pressures, (b) a new wave of pandemic or (c) a low uptake of EU funds under the Recovery and Resilience Mechanism. The further tightening of international financial conditions and the increase of international investors’ aversion to risk create risks for the financing of the real economy, as well as for the uninterrupted and acceptable borrowing costs of the Greek State access to the international capital markets. However, measures taken by the ECB to prevent the fragmentation of the euro area financial system are expected to reduce these risks. In addition, significant risks in the field of inflation are associated with the possibility of further increase in international energy prices in combination with the weakening of the euro against the dollar, as well as the possibility that inflationary pressures will be more persistent, leading to increases in nominal wages and thus set in motion a feedback rise in inflation. In case of rapid and intense tightening of monetary policy due to higher than expected inflation and / or a further deterioration of confidence and decline in activity in key trading partners, stagnant inflation phenomena could be observed in the Greek economy. Additional risks for the Greek economy stem from the geopolitical tensions in the Eastern Mediterranean.

Banking system: Profitability, decline in capital adequacy, reduction of non-performing loans

In the first quarter of 2022, Greek banking groups recorded profits as a result of the occurrence of non-recurring income, the reduction of operating expenses and, mainly, the reduction of provisions for credit risk.

In terms of capital adequacy, both the Common EquityTier 1 (CET1) and the Total Capital Ratio (TCR) on a consolidated basis fell slightly in March 2022 to 12.2% and 15% respectively. (from 12.6% and 15.2% respectively in December 2021). At European level, according to data from the European Banking Authority, the weighted average CET1 index stood at 15.7% in December 2021, while the TCR index stood at 19.6%.

At the end of March 2022, the quality of the individual loan portfolio improved, as non-performing loans (NPLs) amounted to € 17.7 billion, down by € 0.7 billion compared to the end of December 2021 and by approximately 91 billion euros compared to March 2016, when the highest level of NIS was recorded. The ratio of NPLs to total loans further escalated in the first quarter of 2022 (March 2022: 12.1%, December 2021: 12.8%), but remained high, as, according to data from the European Banking Authority, in At the end of December 2021 the MES index at EU level reached 2.0%. Based on the launched consolidation and management operations of NPLs, a single-digit percentage is expected to be achieved for the entire banking sector by the end of 2022.

Challenges

The main challenge that the Greek economy is called to face is the continuation of the dynamic recovery, which began in 2021, in an unfavorable international environment.

The coronavirus pandemic, the energy crisis, the skyrocketing inflation and rising uncertainty significantly exacerbate some of the problems facing the Greek economy after the ten-year debt crisis, which could have a negative impact on both the short-term and long-term outlook. of the economy.

For example, the necessary fiscal measures to support businesses and vulnerable groups of the population are slowing down the reduction of fiscal deficits, despite the faster-than-expected de-escalation of the debt-to-GDP ratio. The great dependence of the Greek economy on imported goods and services leads to a deterioration of the current account balance. Increased uncertainty about the future prospects of the economy leads to postponement of investment and consumer decisions, while the expected rise in interest rates could act as a deterrent to the implementation of investment plans, thus delaying the elimination of the investment gap. In an unfavorable macroeconomic environment with high inflation and declining demand, the downward trend in unemployment could be halted and a new generation of non-performing loans created, resulting in an adverse effect on the size of Greek banks.

The slowdown in deficit reduction runs the risk of shattering market confidence in the commitment of fiscal policy to temporary rather than permanent fiscal easing interventions and consequently to a return to primary surpluses. This could disrupt the declining trend of the public debt-to-GDP ratio and, in conjunction with the unfavorable international situation, postpone the upgrade of the Greek government’s credit rating to the investment grade. In this case, as it already seems, significant upward pressures could be exerted on the borrowing costs of the Greek State. The implementation of actions by the ECB to prevent the fragmentation of the financial system in the euro area, as well as the implementation of the investments and reforms envisaged in the National Recovery and Sustainability Plan, as set out below, will play a key role at this point.

The possibility of partial or total interruption of Europe’s energy supply from Russia requires immediate actions in the direction of energy security with new investments in gas storage, finding alternative suppliers, as well as mining hydrocarbons. In this unfavorable environment, the ongoing climate change highlights the significant challenge of accelerating investment in preparation for the economy’s transition to cleaner energy.

Structural weaknesses

Apart from the problems related to the negative international economic situation, the structural weaknesses of the Greek economy that lead to low structural competitiveness still exist. Indicatively, despite significant progress in some areas in tackling the pandemic, justice delivery is slow, public sector efficiency is still low and the digital transformation of the economy lags behind European partners. At the same time, the high degree of dependence of the Greek economy on imports of goods and energy, the increased share of energy costs in Greek companies already before the energy crisis, the small average size of Greek companies and oligopolistic phenomena in several sectors exacerbate the problems of rising international energy and raw material prices and leading to inflation above the euro area average. Moreover, despite the efforts of recent years, tax evasion remains at very high levels, making it difficult to reduce public debt. The projected demographic deterioration due to the aging of the population continues to limit the long-term growth prospects of the economy and increase the risks to the insurance-pension system.

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