The Organization for Economic Co-operation and Development (OECD) has released a report on Greece, highlighting the importance of fiscal consolidation and discipline to attain the coveted investment grade rating. According to the report, Greece is projected to experience a growth rate of approximately 2.2% in 2023, followed by an estimated growth of 1.9% in 2024.
The OECD underlines that maintaining a planned return to primary surplus is essential for Greece to manage inflationary pressures and achieve an investment grade public debt rating. Inflation, although gradually easing since September 2022, remains persistently high due to ongoing labor shortages, leading to wage increases. The report suggests that inflation is expected to reach 3.9% in 2023.
Despite the challenges posed by inflation, consumption growth is expected to slow in the short term, primarily due to high inflation eroding the purchasing power of households. However, the report highlights that investment growth will remain strong, supported by the assistance of the Recovery Fund.
Greece's economy has shown resilience and continued to grow robustly despite headwinds. Investment growth has remained strong, even with rising investment costs and a growing labor shortage. Business confidence has also been on the rise, nearing pre-pandemic levels in April. Responsible procurement expectations indicate expanding demand.
Real consumption has exhibited growth in early 2023, reflecting strong employment growth, despite declining household purchasing power and low consumer confidence. However, job creation has slowed down as the economy approaches capacity constraints.
The report acknowledges that disruptions to energy and global supplies, aggravated by Russia's aggression against Ukraine, are gradually easing. To address potential energy disruptions in the upcoming winter, Greece has been increasing storage capacity through agreements with neighboring countries and expanding liquefied natural gas import capacity.
Government bond spreads have narrowed, with 10-year German government bond spreads decreasing by almost 130 basis points from their peak in October 2022. Electricity price subsidies have protected households and businesses from high energy prices, and subsidies introduced during the energy price shock are being phased out by the second half of 2023, limiting their fiscal cost to 0.5% of GDP.
In April 2023, pensioners received one-off payments of 0.4% of GDP linked to cost of living increases. Other fiscal measures in 2023 amount to 1.8% of GDP, including a tax subsidy for the cost of mortgage interest.
The report highlights that monetary policy tightening in the euro area has led to increased borrowing costs. Private sector borrowing costs in Greece reached their highest level since October 2016 in January 2023. However, new lending to the private sector has continued to increase as banks liquidate non-performing loans and expand their lending capacity through Greece's next generation loans from the EU.
Slowing employment growth and eroding real wages are expected to impact private consumption growth. Fiscal tightening measures will also have an effect on aggregate demand. Nevertheless, real investment growth is anticipated to remain strong, driven by higher borrowing costs and increased spending related to the "Greece 2.0" plan, which includes public investment projects worth almost 1.0% of GDP in 2023, rising to 1.7% of GDP in 2024, along with contributions of 0.8% of GDP annually for private investment projects.
The OECD predicts that headline inflation will moderate in 2023 as energy price declines wear off, but it will continue to remain high due to increased input costs, wage growth, and capacity constraints. Achieving fiscal consolidation is deemed crucial for Greece to secure an investment-grade rating for its public debt.
To mitigate the risk of higher interest rates leading to mortgage defaults, Greek banks have agreed to freeze adjustable rates until April 2024. Additionally, a significant proportion of recent mortgages have been issued at fixed rates, providing some stability.
The report suggests that integrating more women and young people into the labor market could help alleviate capacity constraints. Furthermore, utilizing fiscal windfalls or under-absorption to reduce public debt instead of increasing transfers would help contain inflationary pressures and achieve an investment-grade assessment of Greece's debt.
In order to promote sustainable growth, the report advises strengthening the capacity of the public sector to implement investments, particularly focusing on Greece 2.0 priorities such as expanding renewable energy sources and enhancing the energy efficiency of buildings.
Promoting the adoption of Greece's new paid paternity leave, flexible work arrangements, and expanding care facilities are also recommended to improve participation rates for women and youth, thereby expanding opportunities and assisting the economy in managing its aging population.
By fLEXI tEAM