EY Forecast June 215 rebalancing recovery
Outlook for Delay in agreeing reform agenda has undermined the recovery Published in collaboration with
Highlights The immediate economic outlook for continues to be highly uncertain. Although the Syriza-led Government agreed an extension to the existing adjustment program in February, the Greek government and its international creditors have so far failed to agree a reform agenda that would secure the release of much- has now survived for nine months been forced to rely entirely on its own resources to meet its redemptions and interest payments. This has seen the Government postpone payments to key suppliers and borrow from the cash reserves of local authorities. Reserves are dwindling rapidly and is struggling to meet its redemption schedule without renewed international assistance. between and its international creditors urgently needs to be agreed. While activity appears to have held up in Q1 this year, there are now increasing signs that the uncertainty surrounding s future and the growing lack of liquidity in the economy are beginning to have real economic consequences for activity. The progress made in 214, when the economy emerged from six years of recession, now appears to have been lost, and there was probably a return to recession in Q2 215. Our forecast of GDP growth of 1.8% in 216, after an expected small contraction this year, is therefore conditional on an agreement being reached that would enable to avoid defaulting to the International Monetary Fund (IMF) and the European Central Bank (ECB). Failure to secure an agreement by the end of June would almost certainly precipitate a decision by the ECB to halt the provision of emergency liquidity to the Greek banking sector. This in turn would probably force the Government to impose capital controls, which would leave on the precipice of an exit from the. GDP growth 215. 1% GDP growth 216 1. 8% 215 Unemployment 25. 6% Consumer prices 215 1. 8% EY Forecast June 215 1
Delay in agreeing reform agenda has undermined the recovery slides back into recession is rapidly running out of road and urgently needs an agreement with its international creditors, not only so that funds can be dispersed from the existing adjustment program, but also so that agreement can be reached on financing after that. In February, agreed a four-month extension to its existing adjustment program, conditional on the new Syriza-led Government being able to agree a fully funded reform agenda with its international creditors. No such agreement has yet been reached, forcing the Government to take increasingly extraordinary measures to raise the finance necessary to meet its schedule of external loan and interest repayments. After successfully meeting its repayment to the IMF in May, must now find 1.5b to repay the IMF by the end of June (with several repayments being bundled together), before needing 6.7b to meet bond redemptions owed to the ECB in July and August and some 6m in further IMF repayments. With the existing adjustment program scheduled to be concluded at the end of June, must therefore simultaneously begin negotiations on what will replace it. Failure to reach an agreement would leave the Government on the brink of defaulting to both the IMF and the ECB. Despite exiting a six-year recession last year, there are increasing signs that the uncertainty surrounding s future and a growing lack of liquidity in the economy are beginning to have a negative effect on economic activity. After growing by.7% in 214, the economy contracted by.2% in Q1 this year, with investment in particular showing signs of responding to the uncertain environment as firms increasingly put hiring and capital spending plans on hold. Early indications are that activity contracted sharply in Q2. The manufacturing Purchasing Managers Index (PMI), for example, dropped to 46.5 in April, its lowest level for nearly two years. Signs of a renewed recession in would be particularly unwelcome, imposing further hardship on the population and undermining the Government s efforts to achieve its budgetary program targets. as impetus from consumption and net trade falters The macroeconomic adjustment in has been significant, with the Government undoubtedly making a huge effort to address the imbalances and indebtedness that existed at the onset of the crisis. Hence, a current account deficit Table 1 (annual percentage changes unless specified) 214 215 216 217 218 219 GDP.7.1 1.8 2.5 2.5 2.6 Private consumption 1.4 1.3 1.2 1.4 1.6 1.8 Fixed investment 3. 1.1 3.3 5. 4.8 4.6 Stockbuilding (% of GDP).4.4.2.1.3.6 Government consumption.8 5.5.9 1.7 1.6 1.7 Exports of goods and services 8.8 4. 4.8 4.8 4.9 4.7 Imports of goods and services 7.4.3 3. 3.7 4. 4.1 Consumer prices 1.4 1.8.4 1.1 1.8 1.9 Unemployment rate (level) 26.6 25.6 24.1 22.2 2.4 18.7 Current account balance (% of GDP).5.5.5.5.5.5 Government budget (% of GDP) 3.5 3.1 2.8 2.6 2.3 1.9 Government debt (% of GDP) 177.1 183.2 181.9 176.6 17.9 164.9.1.1.1.1.2.5 Euro effective exchange rate (1995 = 1) 123.9 114.4 113.1 113.3 114.7 116.2 Exchange rate (US$ per ) 1.33 1.11 1.7 1.6 1.9 1.11 2 EY Forecast June 215
of over 14% of GDP in 28 has been transformed into a small surplus, while the budget deficit has been reduced from over 15% of GDP to a little over 3%. This sizeable fiscal adjustment has exacted a heavy toll on the economy and the Greek people. Overall, the economy has shrunk by a quarter, with unemployment rising to a peak of more than 27%, while average earnings have fallen by over 16%. Last year, however, was something of a turning point. The pace of adjustment began to slow and labor market activity finally started to bottom out. This boosted consumer confidence and enabled private consumption in particular to become a strong driver of last year s recovery, rising 1.4%. Average earnings have begun to recover and were up 2.6% on the year in Q4. Together with a recovery in employment, this has arrested the decline in nominal incomes, which increased by 1.5% over the course of 214. Falling oil prices have in the meantime pushed deeper into deflation, with the harmonized index of consumer prices down 1.9% in the year to March. However, the combination of rising nominal incomes and falling inflation has boosted consumer purchasing power, with real incomes rising for the first time in five years by 3.4% in Q4 214. As a result, while the rise in consumption last year was initially funded by a sharp fall in the savings ratio, consumption was beginning to be driven by increases in real income. One of the key questions is therefore whether this positive outlook for consumption can be sustained in the face of continued uncertainty about s future. The Government s decision to suspend payments to key suppliers will have a negative effect on wages. However, this will to a certain extent be offset by the policies designed to boost pensions and welfare payments, especially to the very poor. Over the election period at New Year, last year s solid increases in employment, which saw the previously moribund economy generate 6, new jobs, appeared to have stalled. Retail sales have now been declining in annual terms for the last four months and were down 3.3% in February, which suggests consumer finances may be coming under renewed pressure. Unemployment and negative output gap are long-term constraints In the longer term, the outlook for consumption will be constrained by the continued high level of unemployment and the large negative output gap. These factors are likely to exert significant downward pressure on wage growth for the foreseeable future. As a result, we expect earnings to remain muted across the forecast horizon. In turn, this constrains the outlook for consumption. In the short run, we expect consumption spending to be boosted by pent-up demand, but we expect the effect to diminish over time. Consequently, we see consumer expenditure growth of 1.3% this year and then 1.2% in 216. Net trade has been the other significant driver of the recovery, with net tourism receipts in 214 up more than 1% from the preceding year. But export performance has been mixed, with exports only starting to recover strongly at the start of 214 despite the earlier significant fall in wages. On the other hand, Figure 1 Figure 2 Contributions to GDP growth Unemployment % year 8 Domestic demand Forecast % 3 Forecast 6 4 25 2 2 2 4 Net exports 15 6 GDP 1 8 5 1 12 21 23 25 27 29 211 213 215 217 219 23 25 27 29 211 213 215 217 219 Table 2 Forecast for by sector (annual percentage changes in gross added value) 214 215 216 217 218 219 GDP.7.1 1.8 2.5 2.5 2.6 Manufacturing 1.1 1.6 1.8 2.3 2.4 2.6 Agriculture.5.5 1.7 1.6 1.8 1.9 Construction 17.3 3.8 3.6 3.4 3. 2.8 Utilities 5.6 2.7 2.9 3.2 3.3 3.5 Trade 6.9 2.7 3. 3.2 3.1 3.2 Financial and business services 1.7 1.6 1.9 2.2 2.2 2.3 Communications 4. 3. 3.5 3.7 3.8 4. Non market services.9 5.8.1 1.9 1.8 1.9 EY Forecast June 215 3
Delay in agreeing reform agenda has undermined the recovery the weakness of domestic demand has seen imports fall more than 4% from their peak. Even so, is only running a small current account surplus, suggesting that there is a need for more structural reforms to further enhance competitiveness and so secure a long-lasting recovery. Furthermore, the pickup in consumption is also leading to increased spending on imports. As a result, the positive contribution from trade last year was significantly smaller, at just.2 percentage points of GDP, than in the preceding years when net trade was boosted by the weakness of domestic demand. Looking ahead, we expect this broad pattern to be maintained, with the contribution from net trade constrained by the lack of export competitiveness and rising imports. Indeed, as the recovery becomes more mature and investment spending begins to improve, import growth is likely to accelerate, further reducing the positive contribution from net trade. Investment picture mixed At first sight, the aggregate data suggests that investment spending is still lagging behind the recovery in consumption and exports. And certainly, the investment picture is rather mixed. Total investment rose by 3% last year, the first increase in six years. However, this aggregate figure masks a sharp divergence between housing and business investment. Given the sharp drop in earnings and the increase in unemployment, the fall in housing investment has been precipitous, down some 94% from its peak in Q3 27. And although housing investment has recently shown some signs of bottoming out, the construction sector has obviously been one of the main causes of the recession. In contrast, business investment appears to be rising strongly and was up 4.8% on the year in Q3 214, suggesting that the efforts to restructure the banking sector and improve financing conditions for firms had been beginning to bear fruit. However, investment is likely to prove to be particularly sensitive to the increased uncertainty surrounding s future. Moreover, since the election in January, there has been significant capital flight from the banking system, which is also leading to a severe shortage of liquidity. Both of these factors are likely to constrain business investment until a new program is put in place. The recovery in housing investment meanwhile is forecast to remain muted, as high unemployment and lower wages continue to constrain new developments. As a result, total investment is forecast to fall by about 1% in 215, which would be the worst performance for three years. Conditional on uncertainty being reduced and financing constraints easing, we forecast a gradual investment recovery to get under way in 216, when total investment spending is forecast to rise by 3.3%. As a result of the improvement in consumption and business investment, GDP is now forecast to fall by.1% in 215, before recovery can become re-established in 216. GDP is expected to grow by 1.8% next year, as investment reaccelerates and exports continue to outpace imports. Longer-term challenges remain While next year s return to growth will obviously be very welcome, securing a lasting and sustainable recovery remains challenging. Although unemployment is below its recent peak, it remains exceptionally high, with more than 25% of the workforce without a job. Generating sufficient employment growth to absorb this level of joblessness is going to take the best part of a decade. Therefore, urgently needs a long-term plan that will continue the necessary near-term reforms but also invest in the future. Securing a new agreement with international creditors and the rest of the European Union (EU) will be a fundamental part of that plan. At about 18% of GDP, public debt remains high both by international and historical standards. However, just over 6% of that debt is in the form of bilateral loans from the rest of the EU or borrowing from the European Financial Stability Facility. Both interest payments and repayment of capital on these loans have already been significantly deferred, meaning that the effective interest rate pays on this debt is just over 2%. As a result, the debt-service burden is relatively low, at around 4% of GDP. So even if the Government is successful in negotiating a further restructuring of official sector debt, it is not obvious that this will significantly reduce the need to run primary surpluses in order to place the debt on a declining trajectory. On the other hand, faces significant international redemptions later this year that it will not be able to roll over unless it can secure renewed external assistance. Using the next month to secure a new agreement with international creditors is now an urgent priority. Figure 3 Prices and wages % year 21 Forecast Figure 4 % of GDP % of GDP 2 18 2 18 15 12 Wages 4 16 14 9 6 12 6 3 3 Consumer prices 6 9 1996 1999 22 25 28 211 214 217 8 1 12 14 16 1996 1999 22 25 28 211 214 217 1 8 6 4 2 4 EY Forecast June 215
in ia 1 4. 1 4. 3.2 8 3. 2.4.4 6 2. 4. -.5 1.5 2. 4 1. -1.4. -2.2 2.7. -2. -3.1-4. 7.6 5.2 2.8.4 -.1.2.4.7 1. 2..1 4..31.72..6 6. 1..7 4. 8. 3.8 1.5 1 1.2 6. 2. 5.8 1.6 8. 7.9 2. 1 1 l Macroeconomic data and analysis Learn more about the EY Forecast at ey.com/eurozone: Download the latest EY Forecast and individual forecasts for the 19 member states. Use our dynamic Eurochart to compare country Use the trend analysis tool to compare forecasts 19 nations. EY Forecast June 215 rebalancing recovery EY Forecast June 215 rebalancing recovery ry Forecast March 215 You can select multiple countries to display on the chart. Country EY Forecast June 215 rebalancing recovery y Current Account Balance Government Budget Unemployment rate Government Debt GDP rebalancing ng recovery ry Private Consumption EY Forecast June 215 Trend analysis Fixed Investment Stockbuilding Government Consumption C Clear selection Consumer Prices Exports of Goods and Services Imports of Goods and Services Select a year to compare: 213 214 215 216 217 218 EY Forecast Spring 215 EY s attractiveness survey Europe 215 Comeback time Outlook for EY Forecast: outlook for Spring 215 EY s attractiveness survey: Europe 215 The explores the implications of the latest economic forecasts for banks, asset managers and insurers. Our latest forecast sees improving GDP, growth in consumer spending and falling unemployment across the. Learn more and download the report at ey.com/ fseurozone. are annual reports that examine the attractiveness of selected nations and regions to foreign investors. Europe remains the world s top destination for foreign direct investment. Learn more and download the report at ey.com/ attractiveness.
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