By Tasos Dasopoulos
The widening of the current account deficit, which at the end of the first quarter reached 6.25 billion euros and was more than double the 2.65 billion euros it had reached in the first quarter of 2021, is evolving into another financial headache. staff.
The goal may be to reduce the budget deficit to 4% of GDP this year, from 7.4% of GDP in ’21, but the current account deficit will increase, and significantly, with the help of high inflation. Although everyone recognizes that this is also a result of the energy crisis, it does not change the fact that it reduces the competitiveness of the economy and the possibility of achieving sustainable high growth.
The current account deficit “shows” in essence that the economy is highly dependent on imports that are not offset by exports and is steadily increasing its external debt. in fact, this happens when Greece, with the care of the partners, now has a clear opportunity to leave behind the financial crisis, allocating the approximately 52 billion euros from the Recovery and Resilience Fund and the new NSRF until 2026. In the money These could add another $ 5 billion to low-interest loans to expand the Fossil Dependency Recovery Fund through the new European RepowerEU initiative.
Of course, the worsening of the current account deficit for Greece, in addition to the cyclical increase in the value of imports due to inflation, also has structural features. As paradoxical as it sounds, the increase in the deficit would be recorded even if inflation was in negative territory, as in 2019, due to the growth dynamics of the Greek economy. After 15 years of deindustrialisation, the low productivity of the country in high value-added products and services has resulted in the increase of investments by 21.6%, which is foreseen for this year by the Stability and Growth Program to impose the increase of imports.
Imported inflation also “intervenes” at this point, which increases the deficit more rapidly, since imported products and raw materials are more expensive. According to the Bank of Greece, the current account deficit in the first quarter of the year, before it could incorporate the consequences of the war in Ukraine, widened by about 3.7 billion euros to 8.76 billion. euros, from 5 billion euros in the same period of 2021.
This increase is mainly due to the widening trade deficit due to higher prices for energy products, raw materials and food. In the first quarter of the year, the fuel balance increased its deficit by 1.83 billion euros, reaching 2.625 billion euros this year, from 789 million euros in the same period of 2021. Respectively, the trade deficit, excluding increased by € 1.93 billion to € 6.13 billion from € 4.2 billion in the same period in 2021. The European Commission estimates in its spring estimate that the current account deficit will increase this year to 8.4% (approximately 15.7 billion euros), before falling slightly to 6.4% of GDP (12.23 billion euros) at the end of 2023.
Exports are lower in value
The dependence of the economy on imports is clearer than the fact that, despite the double-digit increase in exports since 2020, they continue to lag far behind imports in value. According to ELSTAT data, the value of imports for the four months increased by 45.6% this year, to 27.02 billion euros, from 18.56 billion euros in the same period of 2021. Of course, part of the large increase is due to that in the first four months of 2021 economic activity was extremely limited, due to measures to reduce the pandemic.
However, a large part of the increase in the value of imports is due to the increase in prices, mainly for fuels. Although Greek exports for the four months of January-April increased by 31.3%, their value increased this year by 3.7 billion euros, to 15.7 billion euros, from 12 billion euros in the first four months of 2021. It is obvious that this difference, as the prices of imported goods increase, will negatively affect the current account deficit, since the more expensive imported products offset the increase in exports.
Tourism is a lifeline
Fortunately, however, ELSTAT data record imports and exports only for goods, but not for services. In this sector, Greece has the “good paper” of tourism, to somewhat mitigate the losses of the trade deficit. Given that the forecasts of the country’s professionals want the full recovery of the turnover to reach a record amount of 18.5 billion euros where it had reached in 2019, there are hopes that for the period of time for which we will have tourist flows the current account deficit will decline. Of course, everything will depend on the course of prices, mainly of fuel, food and other raw materials that have been steadily fueling inflation for a year.
Unfortunately, we do not yet have 12 months of tourism, which would balance on a permanent basis from the services the deficit recorded in the trade balance. On the other hand, the rise of tourism will not come by itself, as it will entice a number of other, “satellite” industries, which in fact were hit two years by the coronavirus pandemic and aim to recover some of the losses this year. Such sectors are transport (air, sea and road), catering, entertainment and culture, which will contribute with their above revenues to the export of services, keeping the current account deficit.
Help from investments as well
A second measure that is expected for this year to act as a “bulwark” in increasing the current account deficit is investment, public and private. From the recently published data of the first quarter for growth it seems that the start of the year was good. part of the economic growth, which reached 7% in the first quarter, was also investments, which increased on an annual basis by 2.36 billion euros, reaching at the end of the first quarter to 11 billion euros, from 8.6 billion that had reached the first quarter of 2021.
This is despite the fact that, at least for public investment, the first quarter was a period of preparation for investment and reform. From now on, large grant programs for small and medium-sized enterprises will start running through the Recovery Fund, which are expected to accelerate the absorption of resources and transform them into investments. Officially, the public investment program is expected to reach 11 billion euros this year. However, it is also expected to receive support from private investment, which will be implemented with financing from the Recovery Fund loans. The relevant platform where the investment proposals are posted has gathered investments totaling 3 billion euros.
Another positive expectation from the public sector comes from the area of privatizations, after their thawing with the end of the pandemic restrictions for 2020 and 2021. based on the budget forecasts, from privatizations which presumably concern investments are expected revenues of 2.2 billion euros.
On the other hand, companies that were planning to invest in corporate bonds will reconsider, as the ECB will soon open the cycle of raising interest rates, increasing borrowing costs.
A barometer for the prospects of the economy but also for the evolution of the current account deficit will be the course of inflation, for which estimates change on a monthly basis.
Most optimistic of all, the IMF forecasts 4.5% inflation for Greece. YPOIK considers that inflation will increase for this year, but not more than 5.6%. The European Commission raises the inflation target to 6.3%, while the most pessimistic of all is the OECD, which in its forecasts published on Wednesday estimates that for this year inflation for Greece will reach 8.8%.
Internationally, the picture is similar. In particular, the European Commission estimates that the Eurozone will have inflation at 6% this year. The IMF’s assessment is the same. More pessimistic is the ECB, which, following successive revisions, has abandoned the theory of cyclical price increases. It now predicts that inflation in the Eurozone will reach 7%, obviously taking into account the positive effect that interest rate hikes that will start next month will have on the de-escalation of prices, which we do not know to what extent or with what speed they will become. In any case, the Central Bank of the euro expects a significant de-escalation of prices, but not earlier than mid-2023, based on current data.
The OECD and Moody’s forecast high inflation for at least the next three years, adding a new element to their estimates: the changes that have been launched to meet the EU’s energy needs. In particular, both organizations note that Europe’s effort to become immediately (by the end of 2022) dependent on Russian oil will bring about structural changes in Europe’s energy market.
Until these changes are completed, ie for a period of 3 to 5 years, the prices of crude oil and other energy products will be maintained at high levels, maintaining the pressures on the European economy. Even if this forecast is considered excessive, surely no one expects prices to fall before the end of 2023.