ING: Strong tourism will help Greece weather the ‘storm’ of inflation

Her Eleftherias Kourtalis

Double-digit inflation will likely weigh on domestic consumption, but strong tourist inflows in the summer will help keep the Greek economy from derailing, ING said.

As he points out, the Greek economy started 2022 on a strong footing, with all components of demand contributing positively to growth in the first quarter. Despite the rapid rise in inflation, private consumption proved to be the strongest driver of growth, possibly reflecting the impact of improving labor market conditions. In the first quarter, employment rose 11% year-on-year and the unemployment rate fell to 12.5%, the lowest level since August 2010.

The impact on commodity prices from the war in Ukraine is sure to affect this positive pattern, but will not derail the Greek recovery, at least in the short term. The energy price shock, boosted by the war, is now fully visible, with headline inflation reaching 11.6% in June, while the 12% year-on-year rise in the food component is also a cause for concern as it will hit hard lower income households.

However, as ING points out, the pressure on disposable income is partially offset by the increase in the minimum wage, but domestic consumption is still expected to take a hit in the second quarter. Consumer confidence started to weaken again recently, with households affected by increasing fiscal pressures. A potential shortfall on the domestic consumption front could however, at least partially, be offset by a steady return of international tourist flows.

A positive tourist summer season

The first indications from the tourism sector show that there is some optimism for the developments during the summer season. International travel services data for April showed that travel receipts were above the corresponding month in 2019 (pre-Covid), with average spend per trip and inbound tourist flows increasing. Most Covid-related restrictions were lifted in May and look unlikely to return at the start of the summer season, despite the recent surge in cases.

In addition, as ING emphasizes, the implementation of projects financed by the Recovery Fund is another potentially strong source of support for Greek development, which will likely act through investments, more specifically in the energy and construction sectors.

Greek debt remains viable

Finally, as the Dutch bank notes, the picture of public finances appears to have benefited from the combined effect of GDP growth and inflation on tax revenues. The recent widening in Greek bond spreads fueled by the accelerated normalization of the ECB’s monetary stance has not changed the debt sustainability picture, at least in the short term.

With an average maturity of over 18 years, interest rate shocks can be absorbed very easily and the effect of inflation on debt works more effectively. A reduction in the debt-to-GDP ratio to 186% of GDP (from 193% in 2021) therefore seems highly likely, according to ING. At the same time, by aiming for a primary surplus in 2023, the Greek government is sending an important message of credibility in a pre-election year. “For Greek debt to remain sustainable in an environment of normalizing inflation, a return to a sustainable combination of primary surpluses and decent GDP growth is indeed required,” he emphasizes.

According to ING’s estimates, Greek GDP will grow at a rate of 4.2% this year, from 2.9% that it predicted before. Growth is expected at 4.8% in the second quarter followed by 3.1% in the third quarter and 2% in the last quarter of this year. For 2023, the Dutch bank lowers the bar, however, to 1.7% from 2.4% before, while for 2024 it predicts a GDP increase of 2.3%. At the same time, ING also places higher inflation in Greece, at 9.7% this year from 8.1% that it predicted a month ago, while in 2023 it estimates that it will drop to 3.9%. As far as debt/GDP is concerned, it will fall to 183.7% this year from 193.3% in 2021, in 2023 you will find yourself at 178.7% and in 2024 at 173.6%.