OECD Economic Outlook, Volume 2018 Issue 1

Greece

GDP growth is projected to rise to 2.3% in 2019. Exports will be the main driver of growth, benefitting from rising external demand and improved competitiveness. Investment and private consumption will recover as confidence rebuilds, following improved fiscal crediblity. Continuing high excess capacity will limit price and wage pressures.

In 2018, the budget surplus will out‑perform the medium‑term target, through restrained expenditure and improved tax collection, but then decline towards the target in 2019. Still, public debt remains high. Reducing it will require sustained pro‑growth reforms, high primary surpluses and additional debt restructuring. Full reform implementation and keeping the momentum are key to strengthening inclusive growth. Ongoing reforms to better administer and target social protection will relieve high poverty, especially among children.

The recovery is gaining traction

Economic growth is the strongest since the onset of the economic crisis. Confidence has been improving, supported by the successful completion of the European Stability Mechanism (ESM) programme reviews. Exports are driving the recovery. Investment rose considerably in late 2017, but its growth remains volatile and low. Employment has kept growing, but private consumption growth continues to be subdued, partly because many new jobs are part‑time or temporary and paid at the minimum wage rate. Excess capacity is still exceptionally large, dampening consumer price pressures.

Greece

Source: OECD Economic Outlook 103 database; and European Commission, Compliance Report ESM Stability Support Programme for Greece, Third review.

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Tight access to finance continues to constrain business investment. Loan demand for fixed investment remains depressed. The stock of non‑performing loans is diminishing rapidly though it remains high. The roll‑out of e‑auctions is key to meeting banks’ reduction targets for such loans. In May 2018 the ECB updated its stress tests of Greece’s systemic banks. It found that banks’ capital bases would cover the capital lost (EUR 15.5 billions) in a hypothetical negative scenario. As in other EU economies, recapitalisation decisions would consider a range of other supervisory information and be decided on a case‑by‑case basis.

Greece. Demand, output and prices

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Maintaining the reform momentum is key for a sustained and inclusive recovery

Public finances are outperforming ESM Stability Support programme targets, helping to restore fiscal credibility, as tax collections and spending controls improve. In 2017, the primary budget surplus reached 3.7% of GDP, or 4.2% of GDP according to the ESM programme definition. Under current policies, it is projected to be well above the target of 3.5% of GDP in 2018, before declining to just above the target in 2019 in the context of fiscal easing. Broadening the tax base and further encouraging electronic payments would reduce informality and further improve tax collection. In March 2018, Greece completed the ESM programme’s third review, allowing funds to be disbursed for debt repayment and rebuilding cash reserves.

Supporting domestic and foreign investment will require sustaining recent reforms to improve product markets, professional services and competitiveness. The government’s National Growth Strategy provides a post‑programme reform framework that will be key to maintaining the reform momentum. It outlines actions to improve the business environment, public sector effectiveness, and the inclusiveness and sustainability of growth.

Family benefit reforms, a planned housing allowance, and expanded school meals are important new measures to lower high poverty rates, and complement the Social Solidarity Income. Social protection administration remains complex, and needs to be simplified to improve equity and cost effectiveness. The extension of compulsory early childhood education and care to four‑year‑olds would raise long‑term learning outcomes, and caregivers’ ability to seek work.

Improving confidence will support the recovery

GDP growth is projected to strengthen in 2018 and 2019 as the recovery broadens to private consumption and investment, supported in 2019 by a reduced structural budget surplus. Softer regional demand will moderate export growth in 2019. Recovering employment and continued low inflation will support private consumption. Among the risks to the outlook, slower progress than expected in addressing non‑performing loans would lower confidence and investment. A shock to public debt service costs, after the ESM Stability Support Programme concludes in August 2018, could weaken public finances and confidence, and thus growth. Slower trading partner growth would weaken exports and could lower confidence. Additional public debt restructuring would reduce vulnerabilities, improve access to finance and boost activity. Stronger progress on the reform programme would raise productivity, investment and exports faster than projected.