Her Eleftherias Kourtalis
Greece is expected to emerge as the growth champion this year, whether there are serious energy shortages in Europe or not, as Wood estimates, placing Greek GDP growth at 6%, led by the excellent performance of tourism, the funds flowing in from EU. and the thematic, as he characterizes it, course of foreign direct investments.
To estimate how GDP and inflation will develop in 2022-2023 in the euro area and Central and Eastern Europe, Wood uses two macroeconomic scenarios.
Scenario 1 it reflects mild disruptions in energy flows, which essentially reflects that the war is continuing, but not to the point of causing ongoing energy shortages.
In scenario 2, the key assumption is significant energy shortages, making 2023 a recession year for the region.
As he points out, the development of economic indicators over the past two months shows that the real economy is starting to slow down, but they also highlight that European economies have weathered the inflation shock better than expected. Greece and Poland are on track to be the growth champions this year, while the Czech Republic and Germany are likely to fare worse than most countries.
The available data show that the impact from the energy shock can unfold in line with previous energy shocks, over a period of three years. At the beginning of the war and until recently, the main danger was recession due to energy shortages. Currently, Wood predicts that the war will continue, where the growing risk is not so much recession, but persistent disruptions leading to more persistent and higher inflation. As a result, policy makers in Europe should focus their attention on adapting their policy so as to enhance competition and maintain the competitiveness of industry and agriculture.
Wood expects inflation to peak at the end of this year, provided there are no energy shortages this winter, and moderate next year due to base effects and housing inflation holding back. However, the drivers of inflation will remain the same as they are today: high energy costs (through utilities mainly next year), high food inflation and wage-related inflation.
Wood believes that government bond yields have already reached their highs and the bond market is once again becoming attractive to foreign investors. He warns that some sell-off remains possible in the near term as he does not believe financial markets are fully pricing in the extent of future ECB tightening. However, now that the ECB has unveiled its anti-fragmentation tool, the bulk of the risks are behind us.
Foreign direct investment – which is a good barometer of a country’s global competitive attractiveness – show healthy net inflows across Central and Eastern Europe, with Hungary lagging behind, and even improving in the Eurozone. Greece performs spectacularly, with net inflows of 3.3% of GDP, while Italy and France show net inflows for the first time in a long time. Germany remains a net exporter of capital, underscoring how acute its economy’s competitive challenges are, which have worsened given the rise in energy prices this year.
Greece’s prospects are excellent
Regarding Greece in particular, Wood appears particularly optimistic about the economy’s prospects, despite the current energy and inflationary shock. As he emphasizes, Greek tourism is strong and heading for an overperformance compared to the levels of 2019.
This, together with a gradual normalization of lending activity and benefits from EU reforms and funds, could push real GDP growth to 6% this year, in Wood’s view.
The outlook for the coming years is equally rosy, as he believes that Greece’s potential growth has risen to 3%, which will help the country outperform the rest of the region, even during the phase of the energy transition which has significant challenges.
Thus, according to scenario 1, growth in Greece this year will move to 6% and in 2023 to 2.5%, while inflation to 13% and 7.5% respectively.
In the adverse scenario of significant energy shortages, i.e. scenario 2, the Greek economy is also expected to record strong growth this year, at 6%, however it will enter a 2.6% recession in 2023, with inflation at 13% this year and 9 % in 2023.
Foreign direct investment inflows will move at rates of 2.5% in both years in both scenarios, while the debt-to-GDP ratio will fall to 190% this year from 198% in 2021 and to 184% in 2023.
In both scenarios the performance of the Greek economy will be superior to the rest of the economies, with the eurozone in scenario 1 recording growth of 2.5% this year and 1.2% in 2023, while in scenario 2 it will move at rates of 2.3% this year and will enter a 3.5% recession in 2023. Similar good performances like those of Greece will also be achieved by Poland, with growth of 5-6% this year in scenario 1, however in the unfavorable scenario the recession in 2023 will be of the order of 4.7%.