8. GREECE Economy shows some resilience in face of capital controls

80

Surprisingly improved expectations

In the first three quarters of 2015, Greeces economy proved resilient despite the introduction of the emergency bank holiday, capital controls, and heightened uncertainty related to prolonged programme negotiations. Private consumption was stronger-than-expected, with households preferring to spend their bank deposits to avoid potential haircuts. However, fiscal drag is expected to weigh on disposable income and private consumption up to the first half of 2016. The tourism sector continued to perform exceptionally well during the autumn. Imports are projected to continue declining faster than exports, resulting to net trade contributing positively to growth. Business confidence, reflected in the Economic Sentiment Indicator and the Purchasing Managers Index, has also recovered relatively quickly from the sharp falls in the summer. Economic sentiment stabilised in October and improved further in December. Overall, our estimate for economic growth in 2015 has been revised upwards to 0.0%.

Real GDP is expected to contract by 0.7% in 2016, amid the negative carryover from 2015 and the faltering domestic demand in the first half of the year. In the second half of 2016, economic activity is set to strengthen supported by a rebound in confidence, the expected easing of capital controls, and compliance with the conditionality of the new ESM assistance programme. Investment should also benefit from the successful recapitalisation of the banks and the re-launch of privatisations. Steady implementation of structural reforms should gradually strengthen economic fundamentals, investment and other components of aggregate demand, leading to a projection of 2.7% for real GDP growth for 2017.

Greeces current account deficit is expected to have declined in 2015 as a whole, partly owing to imports' sharp contraction. The current account is expected to improve further as past and ongoing structural reforms improve external competitiveness. The unemployment rate is estimated to have fallen in 2015 and should

continue to do so in 2016 due to the lagged effects of previous improvements in labour market flexibility. Following large decreases in recent years, compensation per employee is expected to start increasing in 2017. The HICP inflation turned out negative in 2015, since the impact of lower oil prices and weak demand have outweighed the increase in the VAT rate for many items. However, consumer prices are expected to increase as of 2016 in line with the projected economic recovery.

Upside risks to the growth outlook are related to stronger confidence following progress with programme reform implementation and a swifter lifting of capital controls. On the downside, failure to fully deliver on the reform programme and policy uncertainty would undermine growth prospects.

-2

-1

0

1

2

3

4

5

6

-15

-12

-9

-6

-3

0

3

6

08 09 10 11 12 13 14 15 16 17

%

Private consumption Public consumptionInvestment Net exportsInventories Real GDP (y-o-y%)Inflation (rhs)

forecastpps.

Graph II.8.1: Greece - Real GDP growth and contributions, inflation

Public finances stabilise yet need for key reforms remain

The fiscal policy measures agreed with the authorities in the third quarter of 2015 as part of the adjustment programme are expected to deliver savings of up to 2% of GDP through 2017 and result in a primary deficit according to the programme definition (48) close to the target of -0.25% of GDP in 2015.

(48) Excludes the one-off cost of bank recapitalisation.

The recession in Greece in 2015 now appears to have been less severe than expected. Resilient consumption, the successful recapitalisation of banks, steady implementation of structural reforms under the new ESM programme and progress with privatisation should support the rebound in confidence and bring positive growth and stronger fiscal results by the second half of 2016.

Member States, Greece

81

One-off factors related to the recapitalisation of the banking sector completed in late 2015 are assumed to deteriorate the fiscal balance by 3.3 pps. of GDP (49), pushing the headline deficit to 7.6% of GDP in 2015.

The 2016 budget envisages additional savings of 1.1% of GDP from structural reforms in the pension system and income tax, and through a rationalisation of spending that still needs to be specified and implemented. However, further measures will be needed in 2016 and 2017 in order to reach the programmes primary surplus targets of 0.5% of GDP in 2016 and 1.75% of GDP in 2017. As part of the first review of the ESM programme, the Greek government has committed to legislate to ensure that the primary surplus targets throughout the programme are met. Based upon the primary balance targets, the headline deficit is projected to fall to 3.4% of GDP in 2016 and 2.1% of GDP in 2017. Downside risks include higher spending to deal with asylum-seekers inflows and possible delays in the specification and implementation of the additional fiscal consolidation package. The upside risks to the (49) The projection assumes the entire amount of bank

recapitalisation would have a deficit impact. However, the final assessment of the fiscal recording will be available only in the context of the spring EDP notification in April.

forecast stem mainly from revenue administration reforms (whose impact is not included currently in the forecast), and revenue buoyancy in light of the overall resilience of the macroeconomy and tax collection in the second half of 2015.

-2

2

6

10

14

18

30

35

40

45

50

55

60

65

08 09 10 11 12 13 14 15 16 17

% of GDP% of GDP

Graph II.8.2: Greece - General Government Revenue, Expenditure and Deficit

Total RevenueTotal ExpenditureGeneral Government Deficit (rhs)

forecast

Given the lower-than-expected cost recapitalising the banks, the public debt projection has been revised down vis--vis the autumn forecast. The general government debt-to-GDP ratio is now expected to peak in 2016 at 185.0% before declining in 2017 to about 182%.

bn EUR Curr. prices % GDP 96-11 2012 2013 2014 2015 2016 2017177.6 100.0 1.6 -7.3 -3.2 0.7 0.0 -0.7 2.7125.0 70.4 1.8 -8.0 -2.3 0.5 0.5 -0.7 1.8

35.4 19.9 1.9 -6.0 -6.5 -2.6 -0.2 -1.0 -0.920.6 11.6 1.1 -23.5 -9.4 -2.8 -8.4 -3.7 12.8

8.7 4.9 4.9 -36.5 -0.6 18.7 -5.0 -3.0 14.058.0 32.7 5.5 1.2 2.2 7.5 0.0 1.9 3.962.6 35.2 4.3 -9.1 -1.9 7.7 -1.9 0.6 2.7

177.5 100.0 1.3 -4.1 -4.0 0.8 0.3 -0.5 3.02.0 -10.5 -4.3 -0.6 -0.7 -1.1 2.4

-0.1 0.0 -0.1 1.5 0.0 0.0 0.0-0.2 3.2 1.2 -0.3 0.7 0.4 0.30.3 -6.3 -3.6 0.1 1.4 0.9 2.0

10.7 24.5 27.5 26.5 25.1 24.0 22.85.3 -3.0 -7.0 -2.1 -3.7 -2.2 0.94.0 -2.0 -7.4 -2.6 -2.3 -0.6 0.10.5 -1.6 -5.0 -0.4 -1.2 -0.7 -0.6

- - - - - - -3.4 -0.4 -2.5 -2.2 -1.1 0.0 0.73.7 1.0 -0.9 -1.4 -1.1 0.5 0.8

-0.2 -0.2 1.7 0.9 -4.9 -1.4 -0.5-14.8 -10.9 -10.5 -11.7 -11.4 -12.0 -12.0

-9.6 -4.2 -2.2 -3.0 -1.8 -1.4 -0.9-8.1 -2.4 0.4 -1.2 0.1 0.6 1.0-7.8 -8.8 -12.4 -3.6 -7.6 -3.4 -2.1-8.1 -2.5 -6.2 1.3 - -3.7 -0.1 -0.7

- -0.2 2.3 1.3 - -0.6 -0.1 -0.7111.5 159.4 177.0 178.6 179.0 185.0 181.8

GNI (GDP deflator)

Structural budget balance (d)

Saving rate of households (b)

Main features of country forecast - GREECE

Unemployment rate (a)

Gross fixed capital formation

Current-account balance (c)

Contribution to GDP growth:

General government gross debt (c)

GDP deflator

Compensation of employees / head

of which: equipment

Domestic demand

Harmonised index of consumer prices

Table II.8.1:

Net exports

Public Consumption

Trade balance (goods) (c)

Employment

Annual percentage change2014

GDPPrivate Consumption

Exports (goods and services)

Net lending (+) or borrowing (-) vis-a-vis ROW (c)

(a) as % of total labour force. (b) gross saving divided by gross disposable income. (c) as a % of GDP. (d) as a % of potential GDP.

Cyclically-adjusted budget balance (d)

Real unit labour cost

Imports (goods and services)

General government balance (c)

Unit labour costs whole economy

Inventories

Terms of trade goods