Greek economy set to shrink but due for recovery in 2021

In its latest report submitted to Greek Parliament on Monday, the Bank of Greece estimates that the country’s economy is set to contract by 4.4% to 9.4% this year.

According to its Monetary Policy Report three scenarios are envisaged for the development of economic activity in the country under the baseline scenario, economic activity is expected to fall significantly in 2020, with the country’s GDP shrinking by 5.8%, recovering with a 5. % growth rate in 2021 and a 3.7% growth rate in 2022.

The report said that the conditions shaped by the pandemic and the upending of the international environment, macroeconomic projections are subject to high uncertainty. This is why the Bank of Greece has, in addition to its baseline scenario, also considered two alternative scenarios, one milder and one more adverse.

According to the Bank of Greece baseline scenario, economic activity in 2020 is expected to contract substantially, by 5.8% and to recover in 2021, posting a growth rate of 5.6%, while in 2022 growth will be 3.7%. According to the mild scenario, which assumes a shorter period of transition to normality, GDP is projected to decline by 4.4% in 2020 and to increase by 5.8% and 3.8%, respectively, in 2021 and 2022. The adverse scenario, associated with a possible second wave of COVID-19, assumes a more severe and protracted impact of the pandemic and a slower recovery, with GDP falling by 9.4% in 2020, before rebounding to 5.7% in 2021 and 4.5% in 2022.

Private consumption, in the baseline scenario, is expected to decline in 2020 due to a rise in the unemployment rate and a deterioration of real disposable income. In the medium term, and as labor market conditions improve, private consumption would contribute positively to economic activity. Investment is expected to be negatively affected by the pandemic, the surge in uncertainty and the temporary postponement of investment decisions, but should strengthen considerably in 2021-2022, supported by both private and public investment.

Exports of goods are expected to fall in 2020, reflecting weaker external demand as a result of a sharply deteriorating international environment. Tourism receipts in 2020 are expected to contract significantly, as the measures taken to contain the spread of COVID-19 particularly hurt the tourism-related sectors, while demand for the tourism product is also expected to decrease. Shipping receipts will be negatively affected by the world economic downturn and the decline of global trade.

Exports of goods and services are expected to post robust growth in the next two years, driven by the recovery of external demand and improved structural competitiveness. Finally, imports can be expected to develop in line with domestic demand and exports over the entire projection horizon.

Inflation, as measured by the Harmonized Index of Consumer Prices (HICP), is expected to post a negative annual rate in 2020, mainly on account of the downward course of international oil prices, but also of the prices of services, and is projected to pick up slightly by the end of the projection period. Core inflation is expected to remain close to, or marginally below, zero this year, and return to a positive, albeit low, rate by 2022.

The extraordinary fiscal stimulus measures aimed at containing the economic impact of the pandemic, combined with the decline in economic activity and public revenue, are expected to lead to a deterioration in the general government primary balance and debt, compared with the budget forecasts. According to the baseline scenario of the Bank of Greece, the general government primary balance is projected to record a deficit of 2.9% of GDP in 2020, due to the sharp deterioration of economic activity, as projected by the Bank of Greece, and to the fiscal measures introduced by end-May 2020.

The greatest risk is associated with the possibility of a new wave of the COVID-19 pandemic. In addition, the anticipated rise in non-performing loans as a result of the projected recession would limit the provision of credit to businesses and households, thereby delaying the recovery of investment and economic activity. These factors would slow down the recovery, considerably worsen fiscal aggregates and lead to a new increase in the already high public debt. Furthermore, a deterioration of the refugee crisis could have negative repercussions on tourism. Upside risks are associated with a faster implementation of structural reforms and privatisations.

The risks arising from the external environment are associated with a weaker than anticipated recovery of the global and European economies, due to a new surge of the pandemic, and with a deterioration of the financial crisis. The content and timing of an agreement on the future relationship of the United Kingdom with the European Union are an additional factor of uncertainty. Faster progress on the medical front in addressing COVID-19 would reduce uncertainty and quicken the recovery of the global economy.