A new European Commission report released on Thursday stated that it expects the Greek economy to contract by 9.0 percent this year, but rebound, growing by 5.0 percent in 2021, due to the economic upheaval caused by the coronavirus pandemic.
In the report, the EU’s executive agency said that Greece has been severely affected by the COVID-19 pandemic as its large services sector and dependency on international tourism make it particularly vulnerable to shocks triggered by travel restrictions and social distancing measures.
However, the report said that a swift policy response has helped cushion the impact on employment and businesses so far. Economic activity in 2021 is expected to be supported by the additional fiscal measures presented in the draft budget, while funding from the Recovery and Resilience Facility is not included in the forecast, the report noted.
Real GDP Declines by Unprecedented 14 %
In the second quarter of 2020, real GDP declined by an unprecedented 14 percent quarter-on-quarter after a relatively mild decline of -0.7 percent in the first quarter, the result of measures taken to limit the spread of the virus, which were most stringent between mid-March and mid-May.
Both domestic demand and exports were understandably severely affected. The effective policy response to safeguard employment and ensure liquidity for businesses prevented a more negative impact on the labor market in the first half of the year, according to the EC report.
Unemployment peaked at 18 percent in June, up from 15.6 percent in February, but declined to 16.8 percent in July. Economic activity is expected to have recovered to some extent following the gradual lifting of restrictions in mid-May.
However, with some restrictions still in place which are affecting consumer behavior and disposable incomes and the reintroductions of a lockdown because of the rising numbers of infections, private consumption is expected to recover only gradually over the forecast period.
Public Investment and Support to Facilitate Recovery
A high degree of uncertainty, lower revenues and liquidity constraints took a toll on investment in the first half of 2020, but public investment and liquidity support are expected to facilitate the recovery in Greece.
Overall, real GDP is forecast to decline by 9 percent in 2020 followed by a partial rebound at 5 percent growth in 2021 and 3.5 percent in 2022. The export sector also registered a record decline in the second quarter of 2020, with exports declining by 32 percent year-on-year.
Net exports are expected to contribute negatively to GDP growth in 2020, but turn positive during the recovery in 2021 and 2022, according to the EC report. While goods exports are expected to recover quickly, exports of services are expected to remain well below pre-crisis levels even beyond the forecast horizon.
International tourism, which is particularly important for Greece’s economy, was the driver of the large drop in services exports in the first half of 2020. Tourist arrivals are expected to only partially recover in 2021 and 2022. The report says that the mild reaction of the unemployment rate to the drop in economic activity so far can be partly attributed to the support measures incentivizing labor hoarding; however, it is also driven by workers becoming inactive after losing their jobs.
Unemployment to Reach 18% in 2020
Unemployment is expected to reach 18 percent in 2020. The recovery expected for 2021 and 2022 should help contain unemployment below 17 percent in 2022. Driven by low energy prices, compressed demand and VAT tax decreases, inflation is expected to be negative, at -1.3 percent in 2020 before partially recovering in 2021 and 2022.
Uncertainty looms very large, particularly in relation to the tourism sector and travel restrictions, and the remaining size of companies’ safety buffers. Additional risks are related to geopolitical tensions in the region and migration pressures.
On the upside, however, Greece is likely to receive a substantial amount of funding under the Recovery and Resilience Facility, which could significantly support domestic demand once implemented, the report states.
Greece’s headline balance is expected to decline to close to -7 percent of GDP in 2020 due to the economic downturn and the cost of fiscal measures taken to address the crisis, which is estimated at 4.1 percent of GDP. The forecast also incorporates the payment of retroactive pensions worth 0.8 percent of GDP following a Council of State ruling in July 2020.
The primary balance monitored under enhanced surveillance is projected to reach a deficit of 4.5 percent of GDP in 2020. The general government balance is expected to remain in deficit for 2021 and 2022. The forecast factors in the temporary measures announced by the government for 2021; most importantly the decrease in social security contribution rates, the abolition of the social solidarity tax for private sector earners and a new temporary recruitment subsidy program, with an estimated fiscal cost of 1.1 percent of GDP.
The forecast also includes the cost of a stepped-up 7-year defense program. The expected gradual economic recovery and the expiration of the emergency measures are projected to slightly reduce the general government deficit to around 6.25 percent of GDP in 2021.
Going under the assumption of no changes occurring in policy, the general government deficit is expected to decrease further, to 3.5 percent of GDP in 2022. This forecast does not include any funding under the Recovery and Resilience Facility.
The fiscal forecast is clouded by substantial risks, the report says. These risks relate to the activation of state guarantees that have recently been recently issued as part of the emergency measures. Further risks relate to the cost of ongoing litigation cases and remaining public service obligation, which could deteriorate the balance when decided.
The uncertainty related to the full extent of the retroactive compensation for cuts in supplementary pensions and seasonal bonuses introduced by previous pension reforms remains, as the 2020 Council of State ruling has yet to be published yet.
Further risk stems from the potential additional cost of the coverage of the people without health insurance. On the positive side, Greece is expected to greatly benefit from funding under the Recovery and Resilience Facility, which could trigger additional revenues through its expected impact on growth.
Public debt is expected to increase to around 207 percent of GDP in 2020 before declining to around 195 percent in 2022, supported by the economic recovery.
With information from AMNA