EC spring forecasts on Greek economy

European Commission (EC) released on May 3 (Holy Friday for Greek Orthodox) its spring economic forecasts on Greek economy under the title “Contraction combined with a rebound of confidence” noting that a recovery in the Greek economy is expected to start by the turn of the year, supported by improved confidence and the return of liquidity.

EC identifies as key risks to its baseline outlook on the upside, a faster return in confidence or a stronger impact of liquidity infusions through arrears clearance that could lead to an earlier recovery than predicted. On the downside, slippage with policy implementation could undermine confidence adding that interest projections reflect very low short-term interest rates, which could increase earlier than expected.

According to EC, although hard data i still generally negative, softer survey indicators continue to improve since the re-launch of the adjustment program last autumn. Confidence is supported by the achievement of fiscal targets despite the recession, by the high credibility of the recently legislated reforms and measures supporting the fiscal adjustment, by strong improvements in cost competitiveness and by the return of deposits and liquidity to the banking system following tranches’ disbursements and debt-reducing measures over the past six months.

It is noted that €16.6bn of time deposits (their evolution is the best proxy for depositor sentiment) have returned to Greek banks since July ’12, an 18.8% increase on June ’12 balance. Furthermore, MoF has recently announced that arrears to the private sector of €2.2bn have paid over the Dec ’12 – Apr ’13 period.

EC anticipates GDP to contract 4.2% in 2013, 0.2pp better than February estimates, while its forecasts for 2014 remain unchanged calling for a growth of 0.6%. Note that EC forecasts are in line with recent IMF estimates released on April 16. According to EC, the high level of unemployment together with cuts in wages and social transfers will continue depressing private consumption, expected to drop 6.9% in 2013 and 1.6% in 2014 (from -7.7% and -1.3% respectively in previous forecasts published last February).

Investment is likely to continue underperforming in the short run, as the majority of businesses still face liquidity constraints. As a result, gross fixed capital formation is estimated to slip 4.0% in 2013 (vs -4.9% in Feb) strongly rebounding by 8.4% in 2014 (previous forecast +5.7%). Public consumption, which slipped 4.2% in 2012, is anticipated to remain on negative grounds retreating by 4.0% in 2013 and 6.2% in 2014, worse than Feb estimates calling for a 3.5% and 3.8% decline respectively.

Exports, which eased 2.4% in 2012, are seen growing 3.1% in 2013 and 4.6% in 2014, while the drop of imports is anticipated to be maintained, yet at a decelerating pace, from 13.8% in 2012 to 6.5% in 2013 and 1.9% in 2014.

On unemployment, EC notes its rate has increased sharply, reaching 24.3% in 2012 and is forecasted to rise to 27.0% in 2013, as falling aggregate demand offsets sharp reductions in labour costs. Structural reforms in wage setting have already contributed to sharp reductions in unit labour costs and improving competitiveness. Thus unemployment is expected to decrease to 26.0% in 2014 as the economy picks up.

Inflation will continue the deceleration that started in 2010 with consumer prices expected to fall moderately by 0.8% in 2013 and 0.4% in 2014, reflecting weak domestic demand, falling unit labor costs and the implementation of product market reforms.

The C/A deficit (as % of GDP) is projected to further decrease from 5.3% in 2012 to 2.8% in 2013 and 1.7% in 2014. In 2012, this adjustment was driven largely by declining imports. A rebound in exports is expected in 2013. Pre-booking data already suggest an improvement in tourism receipts for summer 2013. In addition, the agreed government debt restructuring measures will improve the primary income balance through lowering interest payments.

While the headline general government deficit amounted to almost 10% of GDP in 2012, this reflected one-off costs of almost 4.0% of GDP associated with the resolution of three banks last year. Net of these one-off measures, despite continued headwind from the deep recession, Greece is estimated to have achieved a slightly better fiscal outcome than expected for 2012. Deficit is anticipated to slip at a higher pace to 3.8% in 2013 and 2.6% vs. 4.6% and 3.5% respectively forecasted last February.

In structural terms, the improvement is also significant, leading to a projected structural balance of +2% of GDP in 2013 and 2014 compared to -1% in 2012 and -14.7% in 2009, reflecting a clear turnaround in the fiscal position compared to the beginning of the crisis.

General government gross debt (as % of GDP), after peaking to 175.2% in 2013, is forecasted to remain broadly stable y-o-y at 175.0% in 2014, declining thereafter at an accelerating pace as the fiscal balance continues improving and economic growth resumes.

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