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Greek Outlook 2016: Backloaded measures require frontloaded action

The felling of déjà vu for the Greek economy is growing once again. Similar to what we have seen time and again over the last 7 years as soon as the Greek economy starts showing some signs of life there comes a new period of prolonged and intense negotiations between the Government and the Institutions ultimately resulting in a new and substantial wave of fiscal austerity, which in turn drags the Greek economy back to recession. With GDP contracting by 1.4%(YoY) in Q1-2016 and with a new set of fiscal consolidation measures equal to 2.2% of GDP to be introduced in the second half of the year, urgent action is required by all sides in order to limit the depth and duration of economic contraction.

Déjà vu all over again

In what follows we estimate a number of macroeconomic scenarios starting from the most pessimistic one where the economy feels the full effect of the austerity measures without any mitigating actions. In that scenario the economy will contract by -2.8%. We believe that the prospect of such an adverse outcome should motivate all policy makers to spring into action.

We also estimate a scenario under which Greek households, in an attempt to cushion the impact of austerity on their living standards, reduce their savings even further, limiting somewhat the size of economic contraction to -2.5%.

Yet, the only factor with true recession – mitigating potency is the clearance of Government Arrears which if distributed timely could help limit the level of GDP recession to -1.1%.