5 7 f GREECE Macro Flash N A T I O N A L B A N K O F G R E E C E Fiscal Data st Notification May Greece strongly overperformed its fiscal targets for a second consecutive year Macro Indicators in pages -7 Nikos S. Magginas PhD Head of Greece Macro Analysis (+) 5 e-mail: nimagi@nbg.gr Effrosyni Alevizopoulou PhD (+) e-mail: alevizopoulou.e@nbg.gr Aikaterini Gouveli MSc (+) 5 e-mail: gouveli.aikaterini@nbg.gr Eleni Balikou MSc (+) e-mail: balikou.eleni@nbg.gr The primary surplus in the General Government Budget increased to a historical high of.% in 7 of GDP from.% in and.% in 5, exceeding the Programme s maximum target for a surplus of.5% of GDP (initially targeted for ). The fiscal overperformance led to a higher-than-expected fiscal drag in 7 of about.% of GDP, compared with initial estimates for a fiscal easing, contributing, inter alia, to the relatively modest GDP growth outcome of.% in 7 against initial estimates for annual growth of c..5% for this year. A surprisingly strong improvement in the financial balance of the social security system of.5% of GDP in 7 (to an annual surplus of.7% of GDP) is the main driver behind the improvement in the primary surplus, reflecting both buoyant revenue (+.7% or c. +.% of GDP, excluding government transfers), as well as restrained spending (-.7% or.% of GDP lower than in ). 7 was the first year since the beginning of the crisis when total spending on pensions declined (down by.7% or.% of GDP), reflecting higher savings from the streamlining of social benefits and additional reductions in average retirement benefits for new pensioners from the application of Law 7/, as well as the complete phasing-in of other reforms legislated in previous years. The recovery in employment is estimated to have added almost +. bn or.5% of GDP to the system s revenue, while revenue from confiscations for contribution arrears and multiple installment arrearsclearance schemes increased by an estimated.7% of GDP. VAT remained the most dynamic contributor to revenue, increasing by 5.5% in 7 compared with an increase in nominal domestic demand of.%, supported by improving compliance related to increased cashless payments. This improvement was offset by the fatigue in direct tax revenue. General Government balance NBG Economic Analysis Department Greece Macro Analysis Team Eolou Str., Athens, Greece - - - - - - - - Gen. Gov. total balance Gen. Gov. primary balance Primary balance (Programme target)
EE FR SK ES LV FI IE AT LT EA BE LU DE NL IT PT SI GR MT CY Greece strongly overperformed its fiscal targets for a second consecutive year, despite modest GDP growth in 7 Greece strongly overperformed its fiscal targets in 7 and achieved the third largest primary surplus among EU countries, in cyclicallyadjusted terms 5 - General government cyclically adjusted primary balance for the EU - 7 as % of potential GDP Cyclically adjusted Gen. Gov. Primary balance as % of potential GDP* Source: Eurostat, IMF & NBG estimates The fiscal overperformance led to a higher-than-expected fiscal drag in 7 of about.% of GDP, compared with initial estimates for a fiscal easing - - *excluding banking system support -,5 General goverment primary balance,,5, -, -,,75, 5 7e, Primary surplus - rd Programme target () Primary surplus () GDP growth (%) During the past two years, Greece has made solid progress in improving its fiscal position. The primary surplus in the General Government Budget increased to a historical high of.% in 7 of GDP from.% in and.% in 5. Indeed, the primary balance exceeded the Programme s maximum target for a surplus of.5% of GDP initially targeted for, despite the lesssupportive-than-initially-expected macroeconomic conditions. The 7 outcome was more than double the Programme target for 7 of.75% of GDP. In addition, in 7, Greece achieved the third largest primary surplus among EU countries, in cyclicallyadjusted terms (5.% of GDP). The overall balance also recorded a surplus of.% of GDP (excluding banking system support), benefitting from low interest rates on official loans. The strength of activity displays important interplays with fiscal policy. On the one hand, weaker activity creates headwinds, especially on the revenue side. On the other hand, a more aggressive fiscal policy holds back activity. Indeed, activity declined by.% in and experienced a relatively moderate expansion of.% in 7. Specifically, the fiscal overperformance led to a higher-than-expected fiscal drag in 7 of about.% of GDP, compared with initial estimates for a fiscal easing (a primary surplus of.75% of GDP in 7 according to the Programme from.% in, or.% excluding one-offs and extraordinary factors). This drag is consistent with the relatively modest GDP growth outcome of.% in 7 against initial estimates by the official sector for annual growth of c..5% for this year. However, this consistent fiscal overperformance supports the credibility of Greece s fiscal adjustment and underpins its capacity to achieve the demanding medium-term targets for a surplus of.5% of GDP for the period -, especially since the achievements are mainly based on recurring/sustainable factors. A surprisingly strong improvement in the financial balance of the social security system of.5% of GDP in 7 (annual surplus of.7% of GDP compared with.% in ) is the main factor behind Sources: ELSTAT, EU Commission, IMF, NBG estimates GREECE NBG Macro Flash May p.
The increase in the primary surplus to.% of GDP in 7 reflects, in large part, an improvement in the social security system surplus by.5% of GDP Gen. Gov. primary balance decomposition (contributions as ) 5 7 Annual change 7/ Central government,7,, -, Local government,,,, Social security funds -,,,7,5 Other (incl. Programme definition adjustments) General government - Programme definition Sources: EL.STAT. & NBG estimates 5 - - -,,,,,,,, General Government Primary balance - main components (ESA adjusted) 5 7 Local government Social security funds Central government The increase in employment supported social security system revenue bn euro Social security contributions & labor income - the improvement in the primary surplus of. pps of GDP in 7. This outcome follows an even more impressive improvement in the social security budget of.5% of GDP in, following the implementation of a major reform (Law 7/ Katrougalos Law ). This improvement reflects both buoyant revenue (+.7% y- o-y or +.% of GDP, excluding government transfers), as well as restrained spending (-.7% or.% of GDP lower than in ). Regarding the former, the main drivers were the recovery in the labor market reflected in healthy employment growth of.% in FY 7 in conjunction with higher-than-initiallyestimated revenue from the settlement of social contribution arrears, including confiscation proceeds. The recovery in employment is estimated to have added almost +. bn (or.5% of GDP) to the system s revenue, with hourly wages remaining broadly flat on an annual basis. Revenue from confiscations for contribution arrears and multiple installment arrears-clearance schemes increased by an estimated.7% of GDP. The net impact on social security revenue from the increase in social contribution rates for the self-employed with medium-tohigh incomes is estimated to have been marginally negative (-.% of GDP), since it was offset by an effective decline in contributions for those who fall into low income brackets, with the latter corresponding to the majority of the self-employed (i.e. the reform was mostly distributive in nature). Regarding social security spending, 7 was the first year since the beginning of the crisis when total spending on pensions declined (down by.7% or.% of GDP), reflecting higher savings from the gradual abolition of EKAS (Pensioners' Social Solidarity Allowance), lower retirements compared with the initial estimates for 7, and additional reductions in retirement benefits for new pensioners from the application of Law 7/, as well as the complete phasing-in of other reforms legislated in previous years, which extended the effective retirement age. In, pension expenditure has stabilized on an annual basis, and had initially been budgeted to increase by.% in 7. 7-5 7 Total social security contributions (left axis) Labor income (right axis) Looking forward, most of the above factors that supported the financial position of the social security system in and 7 are Sources: ELSTAT, MinFin, HLIOS Report, NBG estimates GREECE NBG Macro Flash May p.
5 7 5 7 whereas 7 was the first year since the beginning of the crisis when total spending on pensions declined - - - Social security contributions & total spending on pensions 5 7 Total spending on pensions Social security system revenue from employers and employees contributions partly reflecting a decline in the number of pensioners - - - VAT remains the most dynamic contributor to revenue during the economic recovery 5 - - - - -5 Total spending on pensions & number of pensioners Total spending on pensions Number of pensioners VAT revenue and nominal domestic demand VAT revenue (excl. fuels and tobacco) Nominal domestic demand - - - - - - 5 - - - - -5 of a permanent nature. Thus, the adjustment is expected to be sustainable, and moreover, should be further supported by the continuing improvement in labor market trends. Indeed, in, employment is expected to increase by.% and average hourly wages record their first increase in years (albeit by a sluggish.% according to the existing sectoral and businesslevel wage agreements). It should be noted that the social security system spending will likely experience an increase in - due to the clearance of pending pension claims of about.7 bn (including one-off components of about. bn), and a partial implementation of a number of administrative court decisions against certain pension cuts implemented in previous years (additional cost of +. bn per annum). However, about 5% of the above increases in cost are estimated to be offset by slowing new retirements. Overall, in -, the annual surplus in the social security system should be of the order of about % of GDP versus.7% in 7 and.% in. Primary spending in the State Budget remained unchanged on an annual basis, in 7, as the decline in ordinary budget primary spending by.% of GDP compared with mainly due to lowerthan-budgeted government consumption has offset the increase in public investment Programme spending of.% of GDP and in tax refunds of.% of GDP (including national accounts adjustments). The revenue side also remained unchanged, as the positive impact of higher revenue from indirect taxes (annual increase of.5% of GDP in 7, mainly reflecting higher VAT revenue) and increased receipts from the settlement of arrears on direct and indirect taxes (.% of GDP higher than in ) broadly offset the lower-thanbudgeted revenue from corporate and other direct taxes (.7% of GDP lower than in ). The increase in indirect taxes at the same time that direct taxes declined likely reflects an increase in direct income tax evasion (see graph on page 5). The solid annual increase in VAT revenue of 5.5% compared with an increase in nominal domestic demand of.% (. excluding imports) suggests that VAT remains the most dynamic contributor to revenue during the economic recovery. Indeed, VAT revenue remained on a steadily upward trend, Sources: ELSTAT, MinFin, HLIOS Report GREECE NBG Macro Flash May p.
5 7 5 7 * forecast 5 7 5 7 5 7* supported by improving compliance related, inter alia, to increased cashless payments Electronic payments & VAT revenue *7: estimate based on AADE figures Electronic payments by residents (left axis)* VAT revenue (right axis) Sources: ECB, MinFin & AADE Direct tax compliance weakened in 7, despite favorable labor and business income trends and higher effective tax rates applying since 7 5 5 7 Direct tax (PIT and CIT) revenue as % of the effective tax base (comprised labor income, gross operating surplus and mixed income) % of tax base value Direct & indirect taxes revenue as % of GDP *Budget forecast Direct taxes revenue Indirect taxes revenue Sources: ELSTAT, MniFin and NBG estimates 7 5 7 increasing by.5% of GDP on an annual basis in 7 (of which.% of GDP corresponds to higher VAT revenue excluding fuels). This performance was supported by improving compliance, related, inter alia, to increased cashless payments, a favorable carry in H:7 from the VAT hike in July, and some additional changes in indirect taxes in effect since January 7. Most notably, it appears that the tripling in the value of cashless transactions (from % of GDP in to nearly % of GDP in 7) that followed the imposition of capital controls, along with the new legislation for obligatory acceptance of cashless payments for several sectors of economic activity (in two stages: June 7 and January ) have discouraged transactions in the shadow economy. The achievement of a sizeable primary surplus in is supported by an envisaged acceleration in GDP growth to above % in, especially as the effective fiscal stance is estimated to be expansionary in when the primary surplus target is set at.5% of GDP from.% in 7. This corresponds to a prospective fiscal loosening of about.7% of GDP and a broadly analogous boost to GDP in, compared with a drag of.7 pps and. pps of GDP, respectively, in and 7. Finally, the fiscal overperformance in FY:7 bodes well for the timely creation of a cash buffer by the Greek State ahead of the completion of the rd Programme. In fact, the cash arising from the General Government surplus of.7 bn in FY:7 (adjusting for cash payments for arrears clearance of. bn) adds directly to the Government s cash buffer. Recall that.5 bn was raised through sovereign debt issuance in H:7 and M:, in addition to. bn already disbursed under the Programme for this purpose and a primary surplus of. bn recorded in the State Budget in M:, bringing the current estimate of the cash buffer in the vicinity of bn. As a final point, the large fiscal surplus in 7 is expected to support the declining trend in public debt which started in 7 -- down to 7.% of GDP in 7 from.% in -- for the first time since the start of the crisis (excluding the PSI and the extraordinary funding squeeze in 5), a year earlier than initially estimated. Sources: ELSTAT, MinFin, AADE, ECB, NBG estimates GREECE NBG Macro Flash May p. 5
5 7 5 7 5 7 7 Greece: Tracking the economy s cyclical position Aug-5 Sep-5 Oct-5 Nov-5 Dec-5 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan-7 Feb-7 Mar-7 Apr-7 May-7 Jun-7 Jul-7 Aug-7 Sep-7 Oct-7 Nov-7 Dec-7 Jan- Feb- Mar- Apr- PMI (index level),, 7,, 5, 5,,,,7, 5,,7 5,,,,,, 7,7,7,, 5,5 5,5 5, 5, 5, 5, 5, 55, 5, 55, 5, Industrial confidence (index level) -, -, -, -, -, -, -, -7, -7, -, -, -7, -5, -, -,7-7, -5,7-5, -5, -,7-5, -, -7, -,7 -,7 -,7 -,7 -,,,, -, -, Manufacturing production (yoy),7,7 -,, 5, 5,, -,7 7, 7,,,,, 7,, -,, 5,7, -, 5,,,,,5,,7 7,,, Industrial production (yoy),, -,7,,, -, -,,7,5, 5,5,5 -,,,,5 7,,5,,,,, 5,5,,,, -, -, Services confidence (index level) -, -5, -, -5, -, -5, -, -7, -, -, -7,5 -, -, -,,,5 -, -,,,,,5, 7,, 5,,,,,, 7,7, Consumer confidence (index level) -5 - - - - - -7-7 -7-7 - - -7 - - -7 - - -7-7 -7-7 - - -57-5 -5-5 -5-5 -5-5 - Retail confidence (index level) -, -, -5, -, -5, -,,, 5, 5,,7,, 5,,7,,,,,7,,5 -, -, -,,,, -,,,,, Retail trade volume (yoy) -, -, -, -,, -,7 -, -, -, -, -,,5 -,,,, -, -,, -,,,,7,5, -, -, -,,7, -, Construction Permits (yoy) - - - - 7-5 -5-7 - - 5-5 -5 7 5 5-7 - House prices (yoy, quarterly series) -, -, -5, -5, -5, -, -, -, -,5 -,5 -,5 -,5 -,5 -,5 -, -, -, -, -, -, -, -, -, -, -, -, -, -, -, Construction confidence (index level) - -5 - -7 - - - - - - - -5-5 - -7-5 - -5 - -5-5 -7-5 - - -7-5 -5-5 -5-5 -55-55 Employment (),,,,5,,5, 5,,,,,,,,, -,,,,5,,5,,5,,,,7,,7 Interest rate on new private sector loans (CPI deflated),,5, 5,7 5, 5,7 5,,, 5,7 5,, 5, 5,7 5,5 5,7,,7,,7,,,5,7,,7,,, 5,,,7 Credit to private sector () -,7 -, -, -,7 -, -5, -, -5, -, -, -, -, -,7 -,7 -, -,5 -,5 -,7 -,5 -,7 -, -,7-5, -, -, -, -, -7, -5,7-5, -5, -, Deposits of domestic private sector () -7, -, -, -7, -,5-7,5 -, -, -, -,,5,7,,,,,,,,,,,,,,,,,7, 5,, Interest rate on new time deposits (households, CPI deflated),7,,,7,,7,,,,7,,,,,,,7 -,5 -, -, -, -,5 -, -, -, -, -, -,5,,,5, Economic sentiment index (EU Commision, Euro area) 5 5 5 5 5 7 7 7 7 5 5 Exports (other (excl.oil&shipping) m mov.avg 7, 5,,, -, -, -, -, -, -, -, -, -,,5,, 5,,5 5,,, 7,5,,,,,,,,,7 Imports (other (excl.oil&shipping) m mov.avg -, -5, -,5 -, -, -,7 -, -, -, -,5 -,,,, 7,,, 7,,,,,,, 7,,,,,,, NBG Composite Index of cyclical conditions -, -, -7, -, -,7 -, -5, -,5 -, -, -,7 -, -, -, -, -, -, -, -, -7, -, -, -7,5-7, -, -, -,5 -, -,5,7,5, Color map scale Sources: NBG, BoG, ELSTAT, EU Commission, IOBE Rapid contraction Moderate contraction Slow contraction Stabilization Slow expansion Moderate expansion Rapid expansion Q Q Q Q Q Q Q Q Qf Qf Qf Qf GDP (real, %, s.a.) -, -,,, -, -,, -,,,5,,,,,, GDP (real, % q-o-q, s.a. ) -, -,,5 -,,,7,,,,, -, Domestic Demand () -,,7,, -,,7,5 -,,,,,,5,,, Final Consumption () -, -, -,,7 -, -,, -,5,, -, -,,,,,5 Private Consumption () -,5,,,7 -, -,,7,,, -, -, -,,,, Fixed Capital Formation () -,,5,7, -,,,7 -,,5, -,5,,,,5 -, Residential construction -5,7 -, -,7, -, -, -, -, -, -5, -7, -, Total GFCF excluding residential,,5,, -,,7 5, -,,, -,, Inventories * (contribution to GDP) -,,,7,,7, -,,, -,,7 -,,,,, Net exports (contribution to GDP),7 -, -, -,, -,7 -, -, -,, -,7,, -,5 -,, Exports (), -,,, -,5 -,,, 5,,7 7, 5, 7,,5 5,5, Imports (),, 7,5, -,5 -,, 5,,,,5, 5,5 7, 7,,7 *also including other statistical discrepancies / Source: ELSTAT, NBG estimates Source: EL.STAT. and NBG Research Estimates Greece: Growth Outlook 5 7 f 7 f GREECE NBG Macro Flash May p.
Greek Economy: Selected Indicators 5 7 f Q Q Q Q year aver. Q Q Q Q year aver. Q Q Q Q year aver. Q Most recent GDP,, -,,5 -, -, -,, -, -,,,5,,, Q:7,, Domestic demand, -, -,,5 -, -,,7,5 -,,7,,,,, Q:7,, Final Consumption,5, -,, -, -, -,, -,5 -,,, -, -, -, Q:7 -,,7 Gross fixed capital formation 5, -, -,, -, -,,,7 -,,5,5, -,5,,7 Q:7,, Exports of goods and services,,7 -, -,, -,5 -,,, -, 5,,7 7, 5,, Q:7 5,, Imports of goods and services 5,, -, -,, -,5 -,, 5,,,,,5, 7,5 Q:7,, Retail sales volume (),, -, -, -,5 -, -,,,7 -,,,, -,5, Feb -, Retail confidence (5-yr. average: -,) -, -, -5, -, -,, 5,,,5, 5,, -,,,5, Apr, Car registrations (),, -,,, -,,5,,,7 7,, 5,,5, Jan 5, Consumer confidence (5-yr. average: -5,) -7, -, -, -, -5,7-7,5-7, -, -5, -, -7, -7, -57, -5,7 -, -5, Apr -, Industrial production (), -,5,,5, -, 5,,,,5,5,,,,5 Feb -, Manufacturing production (),7 -, -,5,,, 7, 5,,,,,7,,5, Feb, Capacity Utilization (5-yr. average: 7,7) 7, 7,, 5, 5, 5,, 7,5, 7,,,7 7, 7,,5 Feb 7, Industrial confidence (5-yr. average: -,) -, -, -, -, -, -, -,5 -, -, -7, -5, -7, -, -, -,,7 Apr -, PMI Manufacturing (base=5),5 7, 7,5,5 5,,,5,,7, 7,, 5, 5,5 5, 55, Apr 5, Construction permits (), -5, -, 5, -, -, -,, -,5-7,,7, 5,7,7, Jan,7 Construction confidence (5-yr. average: -,) -, -, -, -,5-7, -7, -, -55, -55, -7, -5, -5, -, -5, -5, -5, Apr -5,7 PIP Disbursements () -, -57, -,, -, 7,, 5, -, -, -, -, -7, 5,7-5, -, Mar -, Stock of finished goods (5-yr. average:,), 5, 7, 5, 5,,5,,,,7,7,,7,,, Apr 5, Current account balance (% of GDP) -, -,, -, -, -,5 -,, -, -, -, -,, -, -, Feb -, -, Current account balance (EUR mn) -5-75 5 - - -5 - -5-7 -7-7 575-7 - Feb - Services balance, net (EUR mn) 7 757 7 77 7 5 5 7 Feb 5 Primary Income Balance, net (EUR mn) 77-575 -5 75 - - 57-5 - -5-77 Feb -55 Merchandise exports non-oil ( cum.), 7,5,,, -, -,5,,,,5,5,7,, Feb, Merchandise imports non-oil ( cum.), -, -7, -7, -7, -, -,,,, 7,,,,, Feb, Gross tourism revenue (),5,,7 -, 5,, -,7-7, 7,5 -, -,,,,, Feb,7 International tourist arrivals () 5, 5,, -, 7, -, -,,5 5, 5, -,,, 5,,7 Feb, Unemployment rate 5, 5,,7, 5,,,5,,,5,,5,,,5 Jan,, Employment growth (),,,,,,,,,,,5,,,5, Jan,7, Headline inflation -, -, -, -, -,7 -, -, -, -, -,,,,,, -, Mar -,, Core inflation -,7 -, -,5, -,5,, -, -,7 -, -,,,,,, Mar,,5 Producer prices excl.energy -,,, -,, -, -, -, -, -,7,,,,5,5 Jan, Gov. balance as % of GDP (excl. banking system support) -,,,,* Government debt as % of GDP 7,, 7, 77,** Revenues Ordinary budget (cum. % change) -, -5,7 -,7 -, -,,,,7 7, 7,, -,, -, -,,7 Mar,7 Expenditure Ordinary budget (cum. % change) -, -,7-5,,, -,,7,5,7,7 -, -, -,7 -, -, -,5 Mar -,5 Deposits of domestic private sector -5, -, -, -,5 -,5 -,,5,,,,,,,7,7, Mar, Loans to private sector (incl. sec. & bond loans) -,5 -,7 -,5 -, -, -, -, -, -,5 -,5 -, -, -, -, -, -, Mar -, Mortgage loans (including securitized loans) -, -, -,5 -,5 -,5 -, -, -, -,5 -,5 -, -, -, -, -, -, Mar -, Consumer credit (including securitized loans) -,5 -, -, -, -, -,7 -,5 -,7 -, -, -,7 -,7 -,5 -,5 -,5 -, Mar -, -year government bond yield,,, 7,,,5,, 7,5, 7,, 5,5 5,,, Mar, Spread between year and bunds (bps) 7 7 55 5 7 577 5 55 Mar USD/euro,,,,,,,,,,,7,,,,, Mar, * according to Greek State Budget ** according to EU Commission, Spring Forecast, May Sources: BoG, NSSG, MoF, ASE, Bloomberg and NBG estimates unless otherwise indicated Real economy ( period average, constant prices) Coincident and leading indicators (period average) External sector (period average) Employment Prices ( period average) Fiscal policy Monetary sector (, end of period) Interest rates (period average) Exchange rates (period average) GREECE NBG Macro Flash May p. 7
NATIONAL BANK OF GREECE Main contributors: (in alphabetical order): E. Alevizopoulou, E. Balikou, A. Gouveli, N. Magginas, G. Murphy, P. Nikolitsa. This report has been produced by the Economic Analysis Division of the National Bank of Greece, which is regulated by the Bank of Greece and is provided solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on its contents, effecting their own independent enquiry from sources of the investors sole choice. The information contained in this report does not constitute the provision of investment advice and under no circumstances is it to be used or considered as an offer or an invitation to buy or sell or a solicitation of an offer or invitation to buy or sell or enter into any agreement with respect to any financial asset, service or investment. Any data provided in this bulletin has been obtained from sources believed to be reliable but have not been independently verified. Because of the possibility of error on the part of such sources, National Bank of Greece and/or its affiliates does not guarantee the accuracy, timeliness or usefulness of any information. The National Bank of Greece and its affiliate companies accept no liability for any direct or consequential loss arising from any use of this report. The final investment decision must be made by the investor and the responsibility for the investment must be taken by the investor. This report is not directed to, nor intended for distribution to use or use by, any person or entity that is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to any law, regulation or rule. The report is protected under intellectual property laws and may not be altered, reproduced or redistributed, to any other party, in whole or in part, without the prior written consent of National Bank of Greece. Note: The analysis is based on data up to GREECE NBG Macro Flash May p.