Eurozone EY Eurozone Forecast September 213 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain
Outlook for Greece Rising tourism receipts mitigate the pace of GDP contraction this year Finland Estonia Ireland Netherlands Germany Belgium Luxembourg France Italy Austria Slovenia Slovakia Portugal Spain Greece Malta Cyprus Published in collaboration with
Highlights GDP growth 213-4. 6% GDP growth -1 % 214 The Greek economy is set to contract for a sixth consecutive year in 213. However, with GDP declining by 4.6% in Q2, the pace of contraction is slowing amid export figures that are stronger than expected. The country is close to achieving a primary budget surplus (which excludes interest payments), while indicators of sentiment and confidence appear to be bottoming out. The start of recovery may come during 214, and we forecast a return to growth of about 1.7% a year on average in 215 17. A pickup in external demand will be the primary driver behind any recovery, with exports forecast to grow by almost 4% a year in 214 17. Tourism receipts are proving to be an early catalyst for growth, while falling real wages and labor market reforms are slowly improving the competitiveness of the manufacturing sector. In contrast, private consumption will remain weak over the medium term, as high unemployment and falling real wages continue to hit household incomes. With the unemployment rate set to peak at just below 3% in 214, private consumption is not expected to start growing again until 215. The Government continues to push key reforms through parliament, despite losing a junior coalition partner following the closure of the state broadcaster. Achieving a primary budget surplus is an important turning point for the authorities, but there is still much more to be done. Crucial structural reforms to labor and capital markets should be prioritized to enhance competitiveness over the longer term. There are still significant risks on the downside. Although at present there is no longer the threat of an early Greek exit from the Eurozone, fears of political instability persist, particularly in light of very high youth unemployment and the level of social resistance to austerity. Meanwhile, deflationary pressures could undermine the efforts at fiscal consolidation. In addition, the outcome of the upcoming elections in Germany may have important repercussions, after the International Monetary Fund (IMF) indicated that the Greek bailout may require additional funding over the next few years. Exports of goods and services growth 213 -. 6% 213 Unemployment 27. 8% EY Eurozone Forecast September 213 Greece 1
Rising tourism receipts mitigate the pace of GDP contraction this year The immediate outlook for Greece remains bleak. Output is set to contract for a sixth consecutive year in 213, by 4.6%, as the process of fiscal consolidation continues to weigh heavily on domestic demand. But the pace of contraction appears to be slowing. GDP declined by 4.6% yearon-year in Q2 213, which was less than had been expected, reflecting stronger export performance driven by a surge in tourism receipts. Indeed, there are tentative signs that the economy may start to grow again in 214. Falling real wages and labor market reforms are slowly boosting the competitiveness of the manufacturing sector. And the Purchasing Managers Index climbed to a 43-month high in July, having risen in all but one month so far this year. This trend suggests a gradual easing in the pace of decline in manufacturing output. And with the Government set to achieve a primary budget surplus (before interest payments) in Q4 this year, there is a sense that the worst of the fiscal adjustment may also be over. Our medium-term outlook sees the economy returning to growth before the end of 214. Although not enough to avoid a seventh consecutive year of recession with GDP seen falling 1% next year external demand (lifted by improved competitiveness) and business investment will be the primary drivers behind GDP growth of around 1.7% a year in 215 17. External imbalance is slowly being rectified Slowly but surely, Greece is rebalancing its substantial trade deficit. With domestic demand so fragile, the outlook for the economy is dependent on external factors. Although set to contract by.6% in 213, export growth is forecast to average close to 4% a year in 214 17, as falling real wages boost the competitiveness of businesses on the global market. And tourism is proving to be an early catalyst for what is hoped to be an export-led recovery over the next few years. Figures released by the Bank of Greece indicate that tourism receipts in H1 213 rose by 18% from the same period in 212. Greece (annual percentage changes unless specified) 212 213 214 215 216 217 GDP 6.4 4.6 1. 1.3 2. 1.9 Private consumption 9.1 7.4 1.9.6 1.8 1.9 Fixed investment 19.4 7.5 1.2 5.1 5.8 6.1 Stockbuilding (% of GDP)..4.1.4.7.5 Government consumption 4.3 7. 4.8.6 1.7 1.7 Exports of goods and services 2.1.6 3.7 4.9 3.4 3.5 Imports of goods and services 13.8 9.4 1.3 4.8 6.2 4.5 Consumer prices 1..4..4.8 1.4 Unemployment rate (level) 24.3 27.8 29. 28.2 27.1 26.1 Current account balance (% of GDP) 3.4 1.4.4.1.. Government budget (% of GDP) 1. 5. 3.9 3. 2.5 2.1 Government debt (% of GDP) 152.2 165.4 166.8 165.2 162. 158.3 ECB main refinancing rate (%).9.6.5.5.5.7 Euro effective exchange rate (1995 = 1) 115.5 119.4 117.7 114.1 112.8 112.1 Exchange rate ($ per ) 1.28 1.31 1.24 1.19 1.18 1.18 Source: Oxford Economics. 2 EY Eurozone Forecast September 213 Greece
With domestic demand so weak, the pace of import contraction shows no sign of abating in the short term. So although export volumes are falling, a larger contraction in imports will lead to the current account deficit narrowing to around 1.4% of GDP in 213, down sharply from nearly 15% in 28. as is the fiscal imbalance The Government recently passed key austerity measures to ensure receipt of the latest tranche of bailout funds from international lenders. Although losing a junior coalition partner following the closure of the state broadcaster, which cut the Government s majority in parliament to just three seats, the prime minister was able to ensure the reforms were pushed through parliament, after agreeing a temporary cut in value-added tax on the hospitality sector. This concession, aimed at stimulating tourism, was agreed after consultation with the European Union and the IMF, adding credence to the growing sense that the process of fiscal consolidation may be over the most difficult stage. Indeed, Greece is expected to achieve a primary budget surplus in Q4 213, a milestone on the path to recovery. Meanwhile, the privatization program received an important boost in July, after a concession was agreed to operate the national lottery, paving the way for the sale of OPAP, the state gaming monopoly. With both deals now expected to be completed later this year, Greece may be on track to achieve the revised privatization target of 1.6b in 213. In the medium term, the fiscal strategy implies an increase in the primary budget surplus toward a target of 3% of GDP in 215 and 4.5% in 216. Revenues will pick up once the economy returns to growth, especially if the new semi-autonomous revenue administration manages to control current tax evasion. However, we forecast somewhat lower primary budget surpluses, of 1.9% of GDP in 215 and 2.4% in 216, so it is likely that further cuts in public finance will be needed in order to meet the targets. But the IMF warns of a shortfall in funding In its latest quarterly assessment, the IMF identified that the current bailout program will not be enough to cover Greece s financing needs over the next few years. As such, with Greece unable to return to the market in the immediate future, Eurozone governments will need to find additional funds of around 11b by 215 to cover the Figure 1 Contributions to GDP growth 8 % year Domestic demand Forecast Figure 2 Government deficit and debt % of GDP % of GDP 2 6 2 18 4 GDP 4 16 2 6 14 2 4 6 Net exports 8 1 12 Government debt (right-hand side) 12 1 8 6 8 1 14 16 Government deficit (left-hand side) 4 2 12 199 1993 1996 1999 22 25 28 211 214 217 18 Forecast 1995 1998 21 24 27 21 213 216 Source: Oxford Economics. Source: Oxford Economics. EY Eurozone Forecast September 213 Greece 3
Rising tourism receipts mitigate the pace of GDP contraction this year country s projected borrowing needs. Of immediate concern is a likely shortfall in financing estimated at around 4.4b in 214. With the IMF unable to release its quarterly loan disbursements unless the program is fully financed for at least one year, Eurozone governments will have to guarantee the extra funds before the next review. As Europe s largest economy, Germany has contributed the most toward the Greek bailout, but German voters are growing increasingly impatient with the need for continued financial support. There is a risk that anti-bailout sentiment could persuade German voters to elect a government less willing to transfer more funds to Greece in this September s elections. This would jeopardize the progress made so far and once again heighten the risk of a Greek exit from the Eurozone. and domestic demand is particularly weak The rapid decline in private consumption is continuing in 213, as rising unemployment, higher taxes and falling real wages hit the disposable income of Greek households. With the bulk of public sector job cuts still to come, unemployment will continue to rise, peaking at just below 3% in mid-214. We forecast consumption will fall by over 7% in 213 and by about 2% in 214. And over the medium term, consumption the primary driver of the Greek economy pre-crisis will act as a drag on the recovery, growing by only about 1.5% a year in 215 17. Meanwhile, with industrial output still falling and limited availability of credit, business investment will fare little better. Fixed investment will drop by 7.5% this year, following falls of nearly 2% in each of the last two years. Over time, investment will gradually pick up, but its return to growth will lag behind exports. Industry is operating at a much lower capacity than historical levels. In the short term, there is significant slack to absorb any rebound in demand, so investment growth will only pick up in the medium term when the recovery becomes more entrenched and the private sector needs to replace a depreciated capital stock. In 215 17, investment growth is expected to accelerate to around 5.5% a year, after a modest rise of just over 1% in 214. Considerable risks still remain The prolonged contraction in household and public consumption has heightened the risk of a sustained period of deflation. Prices fell for a fifth consecutive month in July, falling by.7%. Persistent deflation would not only undermine the competitiveness gains through continued adjustments in real wages, but more crucially would hit government revenues and make future fiscal targets even more difficult to achieve. However, we expect deflation to be a short-term phenomenon, with prices seen rising again during 214 15, after falling by.4% this year. Indeed, the process of fiscal consolidation continues to be the source of greatest risk. With every tax rise and public expenditure cut, it becomes more difficult to implement further reforms amid social unrest and political uncertainty. and structural reforms need to be implemented The gradual rebalancing of the Greek economy has largely been driven by recessionary impacts. But with the process of fiscal consolidation broadly on track, attention should now shift toward accelerating the pace of structural reforms. Failure to do so risks not only the pace of medium-term recovery, but also increases the longer-term danger of another crisis. Required measures include further liberalization of the labor market, and in particular employment protection, to help improve the labor reallocation process and boost hiring activity. Furthermore, administrative reforms aimed at cutting red tape are needed to reduce barriers to entry for firms, to stimulate investment and promote competition. Figure 3 Bond spread and stock market 31 December 198 = 1 % 3,2 45 Figure 4 Unemployment % 35 Forecast 2,8 2,4 Bond spread (right-hand side) 4 35 3 3 25 2, 25 2 1,6 1,2 Stock price (left-hand side) 2 15 15 1 1 8 5 5 4 29 21 211 212 213 Source: Haver Analytics. 22 24 26 28 21 212 214 216 Source: Oxford Economics. 4 EY Eurozone Forecast September 213 Greece
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