Her Eleftherias Kourtali
After a very strong recovery with “driver” consumption in 2021, the Greek economy will move to a new normality this year, where investments will have a more visible role, supported by the inflows of funds from the Recovery Fund, as noted by ING in its current analysis.
The recovery of the Greek economy after the recession of Covid-19 was impressively strong, as he emphasizes. After falling 8.8% in 2020, the economy recorded significant gains in each quarter in 2021, resembling a V-shaped recovery. Although the fourth quarter of 2021 was relatively milder, last year’s average growth for Greece is still to be close to 8%.
Private consumption and summer tourism the main “weapons”
Such a strong recovery came from a combination of factors, the Dutch bank points out. Extraordinary fiscal measures were effective in supporting the labor market, with employment surpassing pre-Covid summer levels and unemployment falling to 13% in the third quarter of ’21, the lowest level since 2010. Labor protection has allowed consumers to spend part of the savings accumulated during the pandemic, with the most obvious positive effects being on durable goods. On the tourism front, the partial lifting of international travel restrictions was reflected in a strong acceleration of inbound tourism flows in the third quarter, which was at the heart of the steady contribution of service exports to GDP growth.
Investments will receive a significant boost in 2022
With the phasing out of emergency support measures for Covid-19, 2022 should signal a transition to more balanced growth, with a greater role for investment. The process will be decisively assisted by the inflow of grants and loans from the European Fund for Recovery and Sustainability, which will be channeled mainly into the digital and green sectors. These should initially boost public investment, which has suffered severe cuts in fiscal adjustments over the past decade, but also stimulate new private investment, ING said.
In terms of private investment, the impetus from RRF funds may not necessarily be smooth, because the structure of the Greek economy, which is still dominated by small businesses, may not represent the most fertile environment for significant investment flows. . However, as he explains, the improved financial position of non-financial corporations and the strong business confidence indicators justify the optimism.
Inflation the biggest risk for 2022
The biggest risk for Greek growth in 2022 is posed by the uncertain impact of rapidly rising inflation on private consumption, notes ING. In Greece, the deflationary effect of Covid-19 had kept annual inflation in negative territory until May 2021, supporting real disposable income and, ultimately, private consumption.
Since then, inflation has risen to 5.1% in December 2021, due to the energy crisis, but also food and beverages, and used and new cars. “We expect good conditions in the labor market to deal with the shock, but milder consumption seems very likely at least in the first quarter of 2022,” the bank said.
Fiscal policy becomes neutral
Strong growth performance in 2021 and their continuation in 2022 is expected to allow for a significant improvement in public accounts. The Greek government has set a goal in the 2022 budget to reduce the primary deficit to 1.2% of GDP, from 7.3% estimated to be in 2021. This is expected to come from improvements in tax revenues and the phasing out of the interim fiscal stimulus, with the neutral fiscal stance being confirmed by a stable forecast for the cyclically-adjusted primary deficit. This will allow further reduction of the debt / GDP ratio well below the 200% threshold.
Thus, according to ING estimates, growth in Greece this year will be 3.4% and in 2023 2.9%. The debt ratio will fall to 195% this year and to 191.2 in 2023. Inflation will peak at 3.3% this year and then fall to 1.7% in 2023, while the budget balance will be in deficit of 4, 5% this year and 2.1% of GDP in 2023.
Source: Capital
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