piraeus bank group


Notes of a Pessimist for a Better Future

In the past we repeatedly referred to the fact that our forecasts, despite being more conservative (for others, more pessimistic) than average, had proved ultimately to more closely reflect the full extent of the recession. However, on this occasion, when the actual data for the first half of 2013 indicate that our initial forecasts of a recession of between -6.5 % and -5.5% notably deviate from the anticipated final outcome, we seize the opportunity to identify the reasons for this divergence.

Our predictions for the economic contraction in 2013 were based on the intense impact that economic adjustment measures amounting to 5% of GDP would exert on the economy, in conjunction with our estimates for the fiscal multiplier and the growth dynamics within the year (see Economic Indicators Bulletin, October 2012). At the same time, we strongly contested the “Troika” baseline scenario for a recovery based on investment – private investment in particular – and exports. The basis of our critique was that in an economy with a very low level of capacity utilization, high interest rates and tight liquidity conditions, the private sector has not even the slightest incentive to invest. Additionally, exports (in constant prices) rose marginally in 2011 and showed a downward trend in 2012.

Furthermore, we discuss the developments in 2013 and the prospects for 2014.

What are the necessary steps to return to sustainable growth?

Our analysis suggests that the Greek economy, after a period of intense recessionary shocks, seems to have reached a new equilibrium. However, the transition from stabilization to growth should not be considered automatic, straightforward or a given. Only by coordinated action from both fiscal and monetary policy authorities will we start to recover part of the output loss of recent years.

Ilias Lekkos

Group Chief Economist