The Bank of Greece (BoG) foresees a faster pace of recovery for Greece beyond 2023, with projected growth rates of 2.2% in 2023, 3% in 2024, and 2.7% in 2025, according to its annual Monetary Policy Report for 2022-2023. The report also indicates a decline in inflation rates, with expectations of 4.3% in 2023 (compared to 9.3% the previous year), followed by further decreases to 3.8% in 2024 and 2.3% in 2025.
However, the Bank of Greece highlights that certain factors, such as food, non-energy industrial goods, and services, could contribute to inflationary dynamics. The report emphasizes the ongoing challenges faced by Greece in achieving real convergence, as the country's per capita GDP currently stands at approximately 55% of the euro area average, compared to around 70% before the debt crisis.
The Bank of Greece emphasizes that sustained growth rates above the euro area average are necessary for Greece to catch up economically. Failure to achieve this could mean it would take more than 15 years for the Greek economy to reach its pre-debt crisis level relative to the euro area. The report states that substantial investments are crucial for this continued convergence process, which must either be financed through national savings or attract foreign capital inflows.
To attract foreign funds and foster investment, the report highlights the importance of creating a business-friendly environment, having highly qualified and skilled human resources, and developing high-level infrastructure and networks. The Bank of Greece warns that leaving structural weaknesses unaddressed could leave the Greek economy vulnerable to external shocks that may disrupt the catching-up process.
The projected performance of the Greek economy is contingent on factors such as de-escalation of geopolitical crises, a decline in energy prices, and the limited adverse impact of the Eurosystem's monetary policy tightening on the euro area economy. Additionally, the projections assume continued support from international tourism, progress in implementing investment projects, and solid growth in the euro area, Greece's major trading partner.
The Bank of Greece acknowledges downside risks to the economic outlook, including a deteriorating external environment, higher and persistent inflation, potential delays in implementing reforms, and a further increase in interest rates. Upside risks, on the other hand, are associated with a faster decline in inflation and a better-than-expected performance in tourism.
Addressing challenges such as obtaining investment grade and exceeding it remains key for the Greek economy. This would enhance resilience, reduce capital-raising costs, facilitate public debt management, and foster investment and economic growth.
Regarding public debt, although Greece's debt-to-GDP ratio remains the highest in the European Union and the second highest globally, the Bank of Greece notes that risks to debt sustainability in the medium term are contained, assuming the fiscal measures in response to the pandemic and energy crises are temporary and European funds are effectively utilized. However, increased uncertainty arises in the longer term due to the gradual refinancing of debt, which exposes Greek government debt to interest rate and market risks, leaving little room for deviation from agreed fiscal targets.
The Bank of Greece recommends a return to constant primary cyclically adjusted budget surpluses of 2% of GDP in the medium term, as rising borrowing costs and lower growth and inflation diminish the impact of the implicit interest rate-growth differential on debt dynamics.
Addressing the current account deficit and enhancing the competitiveness and outward orientation of the Greek economy are additional crucial challenges highlighted by the report. Despite a high deficit in 2022, largely driven by higher fuel prices, the deficit is expected to moderate to 7% of GDP in 2023.
Overall, the Bank of Greece's report presents an outlook for Greece's economic recovery, inflation trends, challenges, and necessary measures to ensure sustainable growth and stability.
By fLEXI tEAM