OECD Economic Outlook, Volume 2019 Issue 1

Greece

The economic recovery is projected to maintain its recent pace, with GDP growing at or slightly above 2% in both 2019 and 2020. Domestic demand will contribute more to growth than in the recent past, offsetting moderating export growth. Investment is expected to start to recover as financing conditions improve. Stronger household incomes due to the recent minimum wage increase and rising employment will support household consumption.

The primary budget surplus continues to exceed medium-term targets, access to international bond markets is improving and cash buffers are substantial. Safeguarding fiscal credibility requires continuing to meet medium-term fiscal targets. Continuing progress in reducing banks’ high non-performing loan exposures will require deeper measures. Additional reforms are needed to bolster productivity and investment, improve the business environment and raise skills.

The recovery maintains its momentum

Greece’s economy grew by 1.9% in 2018, its fastest rate since the crisis. Strong broad‑based growth of exports and private consumption have driven the recovery. Some of the sectors that recorded the deepest downturns, such as construction and real estate, are finally recovering, as record tourist arrivals are leading to new accommodation developments.

Economic activity, investment and non-performing loans: Greece

Source: OECD Economic Outlook 105 database; and Bank of Greece.

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Greece: Demand, production and prices

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Investment remained stable, but at the low level of 11.6% of GDP, in 2018. Bank lending is increasing to some sectors and the demand for credit for large projects is growing, while lending rates of business loans are declining. Banks’ liquidity is improving as deposits keep rising and banks have fully repaid the central bank’s emergency funding. Foreign investors have announced some larger projects but investment inflows are yet to rise. Sales of state-owned assets, which can attract new financing, are progressing more slowly than anticipated.

Reducing non-performing loans and improving job creation are priorities

Banks are making inroads into their high levels of non-performing loans, which fell to 44.7% of outstanding loans in December 2018. E‑auctions of collateral in default are becoming more common, but foreclosures have also increased. The government is introducing streamlined measures to resolve non‑performing household and small business loans secured against a primary residence where income, asset, loan and property values are below somewhat generous thresholds.

The statutory minimum wage was raised by 11% to EUR 650 per month and the youth sub-minimum wage was abolished in February 2019. The increases take Greece’s minimum wage relative to the median wage to near the middle of OECD countries. The increase will reduce in‑work poverty, but it risks abetting informal work and slowing gains in the number of jobs, given weak productivity.

The primary budget surplus continued to exceed medium-term targets, reaching 4.2% of GDP in 2018. Revenue strength, such as the boost to VAT receipts from tourists’ spending, and investment under spending contributed to the outperformance. The 2019 budget maintains the 3.5% primary budget surplus target. Nonetheless, there are risks to expenditure management due to payment arrears and public payroll pressures arising mainly from court rulings. Recent policy announcements will reduce tax revenues, mainly by lowering selected VAT rates, and raise spending, mostly on pensions, from 2019. Following these measures, the government announced its desire to discuss with the European partners the opportunity of lowering the primary surplus target from 3.5% of GDP to 2.5% of GDP in 2020 and using the large accumulated cash buffers to fund the difference. Future fiscal measures should prioritise investing in infrastructure and skills, fighting poverty, and improving public spending effectiveness and controls. These measures along with greater progress in reforms to strengthen public sector administration, to develop out-of-court mediation and to privatise state-owned energy assets would improve competitiveness and reduce barriers to firms’ growth, while supporting medium-term budget targets.

Reviving investment is essential to sustain the recovery

GDP growth is projected to remain at around 2% in 2019-20. Export growth is projected to moderate with softer external demand and renewed competition from other tourist markets. The anticipated pick up in investment follows expected progress in cutting non-performing loan exposure levels, privatising state owned assets, and realising foreign investment projects. The continued large output and employment gaps should limit wage rises and the pass-through to prices.

Deviations from the current medium-term fiscal strategy would undermine gains in fiscal credibility. Delays in reforms to improve the business environment, competitiveness and banks’ health would create downside risks to the projected recovery in investment. A fall in tourism related to a disorderly Brexit could lead to a sharper slowdown in exports. Recent measures undertaken to resolve non performing exposures could produce results faster than expected, boosting confidence and further improving the investment outlook.