Greek economy to return to growth rates in 2014

In its winter forecasts, the EU's executive said that the Eurozone economy will shrink by 0.3 pct this year and will return to an 1.4 pct growth rate in 2014. In its autumn forecasts, the Commission was predicting a 4.2 pct recession in 2013 followed by a growth rate of 0.6 pct in 2014 for Greece, while for the Eurozone it was forecasting a 0.1 pct growth rate this year.

For the EU-27, the European Commission forecasts a 0.1 pct growth rate this year (0.4 pct in its autumn forecasts) and an 1.6 pct growth rate in 2014 (1.6 pct in its autumn forecasts).amna

The unemployment rate is projected to jump to 27 pct this year (up from a 24 pct projection in autumn), easing to 25.7 pct in 2014. The budget deficit is expected to fall to 4.6 pct of GDP this year, from 6.6 pct in 2012 and to 3.5 pct in 2014, while the country's public debt is expected to rise to 175.6 pct of GDP this year from 161.6 pct in 2012, and to remain stable at 175.2 pct in 2014.

The inflation rate is projected to be a negative 0.8 pct this year and a negative 0.4 pct in 2014.

In its report, the European Commission stressed that Greece is emerging from a tumultuous 2012 with renewed commitment and action within a strengthened economic adjustment programme that enjoys strong backing from its international lenders. After the conclusion of a six-month review of the programme and the release of over 50 bn euros in December 2012, there have been some tentative signs of improvement. Banks have seen a reversal of deposit outflows and Greek market interest rates have been reduced significantly.

The Commission noted that demand will contract further in 2013. Nevertheless, carryover from 2012 as well as the ongoing fiscal consolidation are projected to result in a further contraction of 4.4 pct of GDP in 2013. Investment is likely to continue underperforming in the short run, as the majority of businesses still face liquidity constraints or wait to see more evidence of a pick-up of the economy. Though exports are projected to grow as the economy is improving its competitiveness, they are likely to remain subdued due to still weak external conditions. amna

It is expected that these factors will continue to dominate for most of 2013, only partially compensated by the reversal of the liquidity squeeze, notably as the government plans to repay arrears for an amount of up to 4% of GDP. In line with this contraction in demand, the unemployment rate is now expected to peak at 27.0% in 2013.

The Commission forecasts the return to positive quarterly growth rates by end-2013 will be followed by positive full-year growth of 0.6 pct in 2014. This reflects ongoing positive supply-side developments. Reductions in unit labour costs and product market liberalisation are expected to create new business opportunities and to encourage job creation once the economy picks up.

In addition, the bank recapitalisation process and the overall stabilisation of the country are setting the preconditions for a return of capital to the country and renewed credit flows to the private sector. With a large part of the fiscal consolidation effort already legislated, consumers and investors appear to start regaining confidence, which should strengthen domestic demand in 2014. Unemployment is nonetheless forecast to remain elevated at 25.7 pct.amna

Greater flexibility in wage bargaining arrangements drives the forecast for decreasing labour costs. Compensation per employee is projected to fall by 7.0 pct in 2013 and by 2.0 pct in 2014. Together with the effect of structural reforms in the product market, this is expected to translate into HICP deflation of 0.8 pct and 0.4 pct respectively in 2013 and 2014, leading to a significant inflation differential vis-a-vis the euroarea average. This improvement in competitiveness, combined with euro-area recovery, should lead to export growth.

In 2013 the government aims at primary balance followed by a primary surplus in 2014. This is supported by a package of savings measures amounting to 7.2 pct of GDP over 2013-14 which was adopted in November. Given interest payment reductions of almost 1 pct, due to the debt-reducing measures adopted by the Eurogroup in late 2012, the overall government deficit in 2013 is now expected to be 4.6 pct of GDP. The structural balance is estimated to reach a surplus of 1¾ pct.

Gross public debt is estimated at 162 pct of GDP in 2012, 15 pct of GDP lower than in the autumn 2012 forecast, mainly thanks to the debt buyback operation carried out in December 2012. The debt ratio is projected to increase to 176 pct of GDP in 2013 as the economy contracts, after which it is expected to fall at an accelerated pace, supported by an improving budget balance and stronger nominal GDP growth.amna

On the upside, there is a distinct possibility for a stronger return of confidence and the start of the recovery earlier in 2013. This would in turn have positive spillovers on the fiscal balance. Additionally, the repayment of government arrears in 2013 and the reversal of the liquidity squeeze may have a stronger impact on private sector demand thereby offering a bigger offset to fiscal consolidation than projected. amna

On the downside, any hesitation in programme implementation, in both the fiscal and the structural area, may deter investors and weigh on demand. Employment may respond more negatively than forecast to the depressed demand conditions expected in 2013. The one-off costs of measures related to the banking sector and tax refund arrears, whose recording is currently being assessed by statistical authorities, are expected to impact the deficit in 2012 and/or 2013, although at least part of this statistical recording would not affect programme targets.