Greek economy to shrink 2.5 pct in 2012, draft budget

The Greek economy will shrink by 2.5 pct next year, after shrinking 4.5 pct in 2010 and around 5.5 pct this year, according to the projections of a 2012 draft budget approved by the government. The draft budget envisages that the economy will return to positive growth rates in 2013, while unemployment is projected to rise to around 16.4 pct in 2012, from 15.2 pct this year, while the fiscal deficit will fall to 6.8 pct of GDP next year, from 8.5 pct in 2011.

    The draft budget plan painted with bleak colours the economic situation in the country, noting that the external economic environment was less favourable next year, compared with initial estimates, while uncertainties persisted for most development economies and growth prospects were less optimistic than six months ago, with a debt crisis affecting more and more development economies.

    The Greek economy was at a turning point over its growth prospects: a heavy fiscal consolidation program contributed in the short-term in keeping the economy in a recession, but on the medium-term the situation will depend on the composition and the implementation of a structural reforms program.

    Private consumptions will fall by 3.8 pct next year, from -6.2 pct in 2011 and -4.5 pct in 2010, due to lower available income and rising unemployment. Public consumption will shrink by 7.5 pct, after an 8.0 pct decline in 2011 and a 6.5 pct fall in 2010. Investments are projected to fall by 4.0 pct next year, after declines of 12.9 pct in 2011 and 16.5 pct in 2010, while exports of goods and services are projected to rise by 6.4 pct and imports (fixed prices) to fall by 2.8 pct.

    The unemployment rate is expected to rise further to 16.4 pct of the workforce next year, from 15.2 pct in 2011 and 11.9 pct in 2010, while employment is projected to fall by 1.1 pct in 2012, after declines of 5.3 pct this year and 2.1 pct in 2010.

    The inflation rate is expected to fall significantly next year, with the harmonized inflation rate slowing to 0.6 pct, from 2.8 pct in 2011 and 4.7 pct in 2010.

    The M3 monetary index shrank by 10.7 pct in July, reflecting a decline in bank deposits and a sharp fall in financial activity in the country.

    Lending in the private sector remained negative (-1.2 pct in July), reflecting a worsening macro-economic environment.

    The draft budget plan envisages that the government’s fiscal strategy for 2012 will focus on implementing a Medium-term Fiscal Strategy Framework (2012-2015), continuing implementation of structural and institutional reforms, improving a tax and social insurance system, accelerating a privatizations program and restructuring public sector agencies and organizations.

    The new budget envisages additional fiscal measures worth 7.11 billion euros (2.11 billion euros in 2011 and 5.0 billion euros in 2012). The country’s fiscal deficit is projected at 18.69 billion euros this year (8.5 pct of GDP), from 17.1 billion (7.8 pct of GDP) envisaged in the memorandum. The target for 2012 is 14.7 billion euros (6.8 pct of GDP), down from 14.9 billion euros envisaged in the memorandum.

    The draft plan, however, leaves the door open to the possibility of a further widening of the fiscal deficit this year, depending on the stance of Greek citizens and the society in general towards the government policy.

    The fiscal deficit could rise by an additional 8.7 billion euros, or 4.1 pct of the GDP next year, without any additional measures, reflecting lower revenues (7.0 billion euros) higher spending on interest and a worsening of social insurance balance sheets (2.3 billion euros).

    The public debt is projected to reach 371.9 billion euros next year (172.7 pct of GDP), from 356.2 billion euros (161.8 pct) this year and 328.58 billion euros (142.8 pct in 2010).

    The draft budget plan envisages additional measures worth 7.11 billion euros. More analytically, these are: cuts in tax breaks (saving 1.95 billion euros), a special property tax (revenues of 1.7 billion euros this year and 100 million euros in 2012), a new payroll system in the public sector (saving 150 million euros in 2011 and 950 million euros in 2012), a labour reserve in the public sector (saving 200 million euros in 2012), cuts in basic and supplementary pensions (saving 260 million euros this year and 480 million euros in 2012), raising community participation in co-funded programs (saving 800 million euros) and equalizing special consumption tax between diesel and heating oil (revenues of 250 million euros next year).


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