At the end of 2011, we argued (see Economic Report of November 2011) that one of the reasons for the deeper than anticipated economic contraction was the total lack of macroeconomic (both fiscal and monetary) policies, which could act as a counterbalance to the restrictive measures of the Memorandum. Measures such as the unimpeded function of automatic stabilizers, the boosting of public investment (from a fiscal policy point of view) and the reduction of the cost of money (from a monetary policy point of view) could have eased the tension and limited the duration of the crisis. Thus, inevitably GDP has shrunk by 7.1% in 2011, by 6.4% in 2012 and by 3.8% (estimation) in 2013.
However, there are strong indications that after having achieved a primary surplus in 2013 and the recapitalization of the Greek banking system some degree of freedom is starting to become available regarding the implementation of economic policy.
- Despite the fact that in 2014 fiscal policy will also remain restrictive, the negative impact of tax measures (we approach it through the change in the cyclically adjusted deficit) will be less intense in 2014.
- Despite the fact that the Public Investment Program will be marginally reduced in 2014, the restart of major road construction projects and the increased funding from Greek banks and the European Investment Bank will stimulate public investment activity.
- The implementation of a series of actions to boost employment, one of which is a program to provide access for 45,000 unemployed young people to the labour market, will contribute to the curbing of increases in the unemployment rate.
- The fragmentation of monetary policy, which primarily manifests itself through the fact that the low interest rates of the ECB do not translate into a reduction in the cost of money in the periphery economies in the EU and particularly in Greece, has shown some slight signs of decline. However, the level of real interest rates in Greece remains so high that any investment effort in the private sector is ineffective, a fact that has not led the ECB and the Bank of Greece to taking corrective measures.
2014: End of the Recession
As we are going to present in detail further on, according to our forecasts in 2014 the economic recession will come to an end (0% change in GDP) after an economic recession of 3.8% in 2013. In general, the composition of economic activity will not change, but the contraction rates of internal demand will be even more restricted. Consumption and investments (Gross Fixed Capital Formation) will be reduced, but at a declining rate and their reduction will be partially compensated for by the improvement in the external balance.
It should also be noted that the effort of the Greek economy to achieve a positive sign “is being undermined” by the significant negative carry-over effect which is estimated to be -2.6% in 2014.
Key Risk Factors
From an economic point of view the main risk regarding the termination of economic recession is related to consumption. With the saving ratio having already reached -6% of disposable income already in 2012, it is clear that Greek households are using part of their assets (mostly their deposits) in order to maintain the standard of living of previous years. Given the fact that consumption constitutes 70% of GDP, a greater than expected fall in consumption expenditure will drag GDP down to a negative sign. Besides, we should not forget that it is always the last straw that breaks the camel’s back.
Group Chief Economist