The Greek economy is currently at a turning point. Sentiment and expectations have shifted from negative to positive (perhaps too positive), but there will be some delay before this improvement is reflected by the macroeconomic data. According to our baseline scenario, the substantial contraction in the 4th quarter of 2012, will (because of the negative carry-over effect) spill over into 2013. Furthermore, economic activity in H1-2013 will be affected by the implementation of the new fiscal consolidation measures.
Certain upside and downside risks to economic activity, have to be taken into consideration to form a clear view regarding the Outlook.
In a nutshell…
- Consumption (both private and public) will continue to decline.
- Due to the deep and prolonged recession, the level of domestic demand has fallen substantially below that of supply. As a result there is excess capacity and a deficiency of domestic demand in most sectors of the Greek economy. That lack of demand in combination with high real interest rates does not create an environment conducive to private sector investment.
Hence, an investment led recovery can only gain traction (at least initially) through public sector investment. Finally, additional fiscal consolidation shocks need to be avoided at all costs since they will exacerbate an already deep structural recession.