Inflation in 2024 is expected at 3.8% (from 4.3% this year) and for 2025 at 2.3% – What it says about the investment grade
The Bank of Greece “sees” a growth of 2.2% of GDP for this year in the Greek economy , while identifying a number of risks and making recommendations to the new government according to the Bank of Greece’s Report on Monetary Policy 2022- 2023 that Yiannis Stournaras submitted today to the President of the Hellenic Parliament and the Council of Ministers.
The central banker underlines the importance of recovering the investment grade for the progress of the Greek economy and social cohesion, in the current international environment of uncertainty.
In this context, he calls on the government to proceed immediately with the implementation of reforms to address the country’s structural problems.
According to the forecasts of the Bank of Greece included in the “Report of the Bank of Greece on Monetary Policy 2022-2023”, the growth rate of the Greek economy in 2023 is expected to be 2.2%, due to the expected decline in economic activity in the eurozone and the normalization of the growth rate of private consumption. After all, monetary policy is expected to have a contractionary effect on economic activity in 2023, while fiscal policy is expected to be slightly expansionary, as the withdrawal of fiscal support measures is accompanied by a strong fiscal boost from increased investment spending under the NextGenerationEU European recovery instrument ( NGEU).
The 4 bets on the economy front
In the coming years, it is expected that the Greek economy will continue to expand at rates higher than those of the potential product, the level of which has already been exceeded. More specifically, the growth rate is expected to be 3.0% in 2024 and 2.7% in 2025. These performances can be achieved on the condition that the geopolitical crisis in the external environment has de-escalated, prices have decreased of energy and the tightening of the Eurosystem’s monetary policy will have a limited negative impact on the eurozone economy. In addition, the forecasts are based on the assumption that the Greek economy will continue to be significantly strengthened by international tourism, the good course of implementation of investment plans and the development course of the Eurozone.
Where will the inflation “ball” stop?
Inflation, based on the Harmonized Index of Consumer Prices, is predicted to be 4.3%, i.e. at a much lower level than that of 2022 (9.3%), mainly due to the downward trend in the prices of energy goods. Conversely, food, non-energy industrial goods and services are expected to contribute incrementally to inflation dynamics, due to the inelasticity of prices in these categories. Inflation excluding food and energy is forecast at 6.1% in 2023 and is expected to remain high in 2024, due to the incorporation of strong inflationary pressures from the non-energy industrial goods and services components. Inflation in 2024 is expected at 3.8% and for 2025 at 2.3%.
Risks and uncertainties: Downside exogenous risks dominate
The risks surrounding the Bank of Greece’s growth forecasts are mainly on the downside. More specifically, risks for the prospects of the Greek economy are: (a) the further deterioration of the external environment, (b) the higher and more persistent inflation, (c) the lower than expected rate of absorption of the NGEU funds, (d) any delays in the implementation of reforms, with negative effects on productivity and competitiveness, and (e) the further rise in interest rates, which could slow growth and lead to a new generation of NPLs. Any more positive outcome is related to the faster de-escalation of inflation and the better than expected performance of tourism.
The main challenge for economic policy is to achieve investment grade and, at a later stage, to surpass it. Doing so will strengthen the resilience of the Greek economy to exogenous shocks and episodes of volatility in international markets, will limit the cost of raising capital for the public and private sectors, and will facilitate the management of public debt, the realization of investments and the strengthening of economic growth .
The sustainable de-escalation of inflation
The tightening of monetary policy is necessary in order to continue the de-escalation of inflation in the Eurozone and to make it possible to return to the 2% target in the medium term. For as long as the tightening of the European Central Bank’s monetary policy to deal with high inflationary pressures lasts, it is necessary to maintain the restrictive direction of the fiscal policy, so that the de-escalation of
inflation becomes faster.
Otherwise, further tightening of monetary policy could become necessary, with negative ramifications for the duration and extent of the negative consequences of monetary tightening on economic activity. At the same time, both increases in the prices of goods and services and wage increases should be consistent with the medium-term inflation target (2%), taking into account the fact that the profit margins of companies remain high.
High public debt as a percentage of GDP
Public debt as a percentage of GDP remains the highest in the European Union (EU) and the second highest internationally. Risks to public debt sustainability remain contained in the medium term, provided that the fiscal measures taken in the context of the pandemic and the energy crisis are temporary and that European resources are used effectively. However, in the longer term, increased uncertainty is estimated, as the gradual refinancing of the accumulated debt to the official sector on market terms will increase the exposure of the Greek State to interest rate risk and market risk, which eliminates the scope for relaxing the agreed fiscal targets.
High current account deficit
Limiting the current account deficit is an important challenge, despite the fact that the high deficit recorded in 2022 (9.7% of GDP) is due to approximately 40% of increased fuel prices and is expected to decrease to 7% of GDP in 2023 .An economy that is in the process of converging towards the GDP per capita of its partners and which seeks to increase its share of national investment (currently 14% of GDP) to the EU average (22% of GDP) and also spends on its national defense percentage of GDP much higher than the EU average it is inevitable to have a current account deficit.
However, a current account deficit above 4% of GDP sustained in the medium term conflicts with the EU’s macroeconomic imbalances procedure, but mainly indicates that national expenditure is significantly and chronically higher than domestic output or, equivalently, that private and public sector investments are significantly higher than the corresponding savings.
Non-performing loans and high private debt
The ratio of non-performing loans, despite its significant de-escalation, remains significantly higher than the average of Eurozone banks. At the same time, overall private debt as a percentage of GDP remains at very high levels and negatively affects the possibility of new borrowing and the implementation of investment actions.
High unemployment and a mismatch between demand and supply of jobs: Despite a noticeable reduction in unemployment in recent years, several distortions remain, as unemployment rates for women, youth and the long-term unemployed remain significantly higher than the EU average, leading to obsolescence of labor force skills. It is noted that the natural rate of unemployment in Greece is estimated to be close to 13%, twice that of many EU countries, which is an indication of the existence of serious distortions and structural problems. In addition, there is a mismatch between demand and supply of jobs, as businesses in some industries struggle to find suitable workers to meet their needs.
Despite the improvement over the last five years, the Greek economy still ranks relatively low in international structural competitiveness indicators, due to chronic inherent weaknesses. Such weaknesses, which limit competitiveness and create disincentives for investment, include delays in the administration of justice, bureaucracy and the inefficiency that still exists in certain sectors of the State (e.g. in real estate transfers, in the preparation of spatial plans projects, the completion of the National Land Registry, the digitization of public services), the lag in basic infrastructure, the insufficient fight against widespread tax evasion, quasi-oligopolistic conditions in certain goods and services markets and distortions in the energy market. Additional examples of inherent weaknesses are the low participation of women and young people in the labor market in combination with unfavorable demographic trends, the increased risk of poverty and social exclusion, significant regional inequalities, deficiencies in the so-called “triangle of knowledge” (education – research ‒ innovation) and the high dependence of the Greek economy on fossil fuels.
Low GDP per capita
Greece’s GDP per capita corresponds to about 55% of the GDP per capita of the eurozone countries, compared to about 70% before the debt crisis. Making up for lost ground requires maintaining growth rates well above the eurozone average. Otherwise, it may take more than fifteen years for the Greek economy to return to the level where it was in relation to the Eurozone before the debt crisis. This necessary continuous process of convergence presupposes the realization of significant investments, which will either have to be financed by national savings or covered by capital inflows from abroad. However, in order to strengthen investments and in particular to attract foreign capital, the appropriate conditions should be created, i.e. friendly business environment, highly skilled and technical staff and high level infrastructure and networks. Failure to address the structural weaknesses of the Greek economy makes it vulnerable to exogenous disturbances that could once again halt the convergence process that has been launched in recent years.