Financial News: Greek economy to return to growth in 2012, OECD says

The Greek economy will return to sustainable growth next year, helped by increasing demand from abroad, improving competitiveness and results from wide-spread reforms, the Organisation for Economic Cooperation and Development (OECD) said on Wednesday.
In a report, the Paris-based organization said it expected the country’s Gross Domestic Product to shrink by 2.9 pct this year and to grow by 0.6 pct in 2012. The OECD also forecasts that the fiscal deficit will fall to 7.5 pct of GDP in 2011 and to 6.5 pct of GDP in 2012, from 10.4 pct in 2010, while the unemployment rate will rise to 16 pct this year and to 16.4 pct in 2012. The inflation rate will slow to 2.6 pct in 2011 and to 0.7 pct next year, while the country’s current accounts deficit will fall to 8.6 pct of GDP this year and to 7.2 pct in 2012, from 10.4 pct in 2010.
The report noted that there were risks in the country’s course towards sustainable public finances and its return to economic growth. “Several things could move in a negative direction in the international environment, including a further loss of confidence or a significant weakening of exporting markets. The government can do little to affect these factors. It can, however, continue implementing a fiscal consolidation and structural reforms program. Any delay in these sector could damage credibility, worsening an already difficult situation,” the report said.

The Organization stressed that the success of the Greek program depended mainly on “strict control of spending and further progress in dealing with tax evasion, combined with reforms to deal with chronic problems in fiscal management and labor and goods markets”.

OECD, in its economic outlook report, noted that the public debts of Greece, Ireland and Portugal will not be sustainable if market interest rates remained at high levels for long. “Even if governments move towards achieving their fiscal goals, their finances will not be sustainable if market interest rates remained at their current levels for long,” the Organisation said, adding there were three policy options in case these three countries failed to regain market confidence:

First, continuing funding from the EU and the IMF with interest rates much lower than market rates.
Second, extending the maturity of existing debt for a very long period of time combined with lower interest rates.
Third, a wide-spread restructuring of debt.

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