The Greek economy will return to growth in 2012, an announcement by the European Commission on Monday predicted.
The Greek economy will return to growth in 2012, an announcement by the European Commission on Monday predicted.
In its autumn forecasts for the European economy in the period 2010-2012, published in Brussels, the EU’s executive said the Greek economy will shrink by 4.2 pct this year, slowing to a still -3.0 pct in 2011 only to return to positive growth rates (1.1 pct) in 2012.
The Commission said it expected the country’s fiscal deficit to drop to 9.6 pct of GDP this year; falling 7.4 pct in 2011, but rising again to 7.6 pct in 2012. As far as the unemployment figure, it is projected to rise to 12.5 pct in 2010, jumping to 15 pct in 2011 and rising slightly to 15.2 pct in 2012.
The Commission also forecasts that Greek inflation will rise to 4.6 pct this year; falling to 2.2 pct in 2011 and to 0.5 pct in 2012. Greece’s public debt will total 140.2 pct of GDP this year, rising to 150.2 pct in 2011 and to 156 pct of GDP in 2012. All the above estimates are based on the assumption that there will be no change in the country’s economic policy.
The Commission forecasts that the Eurozone economy will grow by 1.7 pct this year, slowing to 1.5 pct in 2011 and rising again to 1.8 pct in 2012. The fiscal deficit in the Eurozone is projected to totaled 6.3 pct of GDP this year, falling to 4.6 pct in 2011 and to 3.9 pct of GDP in 2012. Unemployment is projected to reach 10.1 pct in the Eurozone this year, falling to 10 pct in 2011 and to 9.6 pct in 2012. The inflation rate is projected to total 1.5 pct in the Eurozone this year, rising to 1.8 pct in 2011 and easing again to 1.7 pct in 2012. The public debt in the Eurozone is projected to reach 84.1 pct of GDP this year, rising to 86.5 pct in 2011 and to 87.7 pct in 2012.
The entire Commission text follows:
A decade of expansionary fiscal policies resulted in the build-up of unsustainably high fiscal (high general government deficit and gross debt stock, rising interest payments) and macroeconomic (high current-account deficit and external debt, outflow of income) imbalances.
Following the escalation of the debt crisis in spring 2010 and the setting-up of the three-year Economic Adjustment Programme, Greece adopted comprehensive fiscal consoli-dation measures. They are expected to have a dampening impact on domestic demand in 2010 and the first half of 2011. However, successful and credible fiscal adjustment efforts should boost confidence and improve sentiment. Credibility gains are expected to compensate for the economic cost of adjustment and lead to the beginning of a recovery in the second half of 2011. Sustained fiscal consolidation would support the much needed rebalancing of the economy towards a higher positive contribution to growth of the external sector.
The recent downward revision of annual real GDP data for 2009 (almost -2½% compared with -2% previously) will have an adverse impact on real GDP dynamics in 2010. Moreover, the sharp drop in domestic demand (investment and private consumption in particular) in the first nine months of 2010 points to a significant contraction in economic activity. Despite the recovery in the third quarter, negative average exports growth so far also weighs on this year's economic performance.
Market pressures and high spreads have been keeping up the cost of and limiting private sector access to financing. Credit expansion has been decelerating on the back of tighter credit conditions and high household indebtedness. High frequency and leading indicators suggest that the economy will lose further steam in the current year, before the recovery kicks in during the second half of 2011. For the year as a whole, economic activity is set to contract by -4¼% in 2010. In the short term, fiscal tightening will have a strong contraction impact on economic activity,
on the back of cuts in public wages, an increasing tax burden and ensuing declining disposable income and public spending. Real GDP is expected to further decline by 3% in 2011 - mainly due to carry-over effects - while growth is expected to turn around positively during the second half of the year, with the recovery gaining further momentum in 2012. The contraction of economic activity, reflected in weakening labour demand from the retail,
wholesale and construction sectors, is weighing heavily on employment which is set to fall by more than 5% over the forecast horizon. Reduced employment opportunities in the private sector, along with the recruitment freeze and cuts in short-term contracts in the public sector will push the unemployment rate up to just below 15% in
2012. Negative employment growth and declining wages should weigh on disposable income over the medium-term, dampening real demand. The households saving rate would turn positive already in 2010. As a result, private consumption is projected to contract by around 4% in 2010 and further 4¼% in 2011, before returning to a moderately positive growth rate at the end of the forecast horizon.
Gross fixed capital has been falling since the beginning of 2009, on the back investment retrenchment in both housing and equipment. Public investment activity is expected to remain particularly depressed in 2010 and 2011, as a result of continued fiscal consolidation efforts. Tighter credit conditions and subdued domestic demand
The contraction in domestic demand will be sustained over the forecast horizon, mirrored also by shrinking imports. Total exports, which started to recover already in 2010, will be further enhanced in 2011-12 by labour cost developments and favourable external demand factors. Exports of goods should rise by around 5½% in 2011 and
increase further in 2012, while exports of services - in particular world trade sensitive merchant shipping and tourist receipts - should recover at a similar pace. All in all, the contribution of net exports to GDP growth should be highly positive in 2010-12, due to both the accelerating pick-up in exports and the ongoing contraction in imports.
The risks to this baseline scenario are broadly balanced. On the positive side, the resurgence of both consumer and business confidence and the gradual improvement of liquidity and capitalisation of Greek banks may help to sustain credit expansion at modest levels, which could underpin private consumption and foster investment. In addition, the contribution of net exports to GDP growth may turn out to be stronger than projected, should the impact of ongoing and planned structural reforms materialise more swiftly. On the negative side, the contraction in
imports may prove to be more transitory and less pronounced than expected (especially towards the end of the forecast horizon). If tighter credit conditions persist, external financing to the private sector could prove less buoyant and so the servicing of Greece's high external debt might crowd out domestic spending.
Inflationary pressures have built up in the course of 2010, fuelled by the VAT-rates rises in March and July and the increase in excise duties on alcohol, tobacco and fuel. Based on price developments in the first ten months of the year, annual inflation in 2010 should exceed 4½% on average. The large impact of taxes on inflation, in the context of a severe recession, calls for strong and frontloaded structural reforms targeting the existing inflexibilities in domestic markets. Looking forward, both headline and core inflation should decline, as base effects and tax effects fade out, and slack in the economy and wage moderation start feeding through.
Higher-than-expected tax-driven inflation has not produced any evidence so far of an adverse wage-price spiral that could push labour costs higher. In fact, the competitiveness losses accumulated in recent years will start to be
reversed over the forecast horizon, mainly due to a faster-than-expected labour market adjustment. This will spur labour reallocation and hasten real wage adjustment. The wage cuts in the public sector, their expected spill-over effect in the private sector and the moderate recent private sector minimum wage agreements (the minimum wage will be frozen in 2010 and will increase by 1.5% in July 2011 and 1.7% in July 2012) are expected to push unit labour cost down, after a long period of rapid growth. Private sector average wages are projected to respond accordingly to the strong downturn and the fall in employment, thus contributing to partial recovery of the competitiveness losses.
Developments in the external sector have already kick-started a partial correction of the external deficit in 2010. Further improvement over the medium term is expected, driven by accelerating exports growth and falling imports. The current-account deficit is expected to decline to 8% of GDP in 2011 and to move closer to 6% of GDP in 2012, down from 10½% of GDP in 2010.Expected competitiveness gains and the benefits from ongoing structural reforms may result in an even faster adjustment of the current-account balance.
The 2009 general government deficit notified by the Greek authorities in November 2010 stands at 15½% of GDP, 1¾ pps. higher than the previous notification made in April 2010. Eurostat has lifted the reservations on Greek deficit and debt figures expressed in October 2009 and April 2010(74) and (74) Eurostat (news release 149/2009) has expressed a reservation on the data reported by Greece on 21 October 2009, due to significant uncertainties over the figures notified by the Greek statistical authorities.
This upward revision has been higher-than-anticipated. The major elements of the revision concerned the sector reclassification of public enterprises and their inclusion in general government, the significantly worse-than-expected fiscal position of the social security sector and the accounting of off-market swaps. At the same time,
general government gross debt in 2009was revised upward by 11¾% of GDP, reaching almost 127% of GDP.
For 2010, the official general government deficit estimate stands at around 9½% of GDP (EUR 22.3 bn), 1½% of GDP above the original target of 8% of GDP (EUR 18.5 bn). About one third of the shortfall is explained by propagation effects of Eurostat revisions of the 2009 fiscal statistics. The remaining two-thirds would be explained by revenue underperformance of some 1¾% of GDP (EUR 4 bn) compared with the initial revenue Target.
The 2011 budget (as submitted to Parliament on 18 November) foresees additional measures amounting to 2½% of GDP, which should be sufficient to reach the 2011 deficit target of 7½% of GDP. This would bring total fiscal consolidation measures in 2011 - including those agreed in May - to 5¾% of GDP. About two-thirds of the agreed new measures are on the expenditure side, and most of them are structural in nature. They include cuts in unproductive and untargeted spending, a reduction in short term contracts in the public sector, better targeting of universal household subsidies, and better management and use of state assets, particularly in the collection of arrears.
Taking into account the consolidation measures for 2012 agreed under the Economic Adjustment Programme in May (but no additional ones) and on the back of the discontinuation of one-off measures to be implemented in 2011, the headline deficit should exceed 7½% of GDP in 2012. Debt would increase from 126¾% of GDP in 2009 to 156% of GDP in 2012.