OECD Economic Outlook, Volume 2022 Issue 2

Greece

Growth is expected to moderate from 6.7% in 2022 to 1.6% in 2023 and 2024. Despite the rebound in tourism and continued fiscal support, consumption is projected to slow in 2023 as real incomes shrink and uncertainty remains elevated. Receding energy prices are projected to reduce inflation and support consumption in 2024. Disbursements of Greece’s Recovery and Resilience Plan are projected to sustain modest investment growth in the face of higher costs. Inflation is becoming more broad-based as growing labour shortages contribute to wage pressures.

Planned support measures sustain demand while capacity constraints are growing. Shifting fiscal measures towards income transfers to vulnerable groups and greater support to improve energy efficiency would encourage energy savings, support public finances and ease ongoing inflationary pressures. This would help Greece to achieve an investment grade sovereign debt rating. It would also address longer-term goals, notably cutting emissions and reducing high levels of energy poverty.

Rebounding tourism and fiscal support have driven strong economic growth

Greece’s economy grew strongly during the first half of 2022 owing to rebounding exports, led by services, rising investment, and substantial fiscal support. Tourism receipts from June to August 2022 returned to their 2019 historical peak, while receipts from shipping in the second quarter of 2022 exceeded the same period in 2019 by 57%. Business confidence has retreated slightly since the start of Russia’s war of aggression against Ukraine but remains close to pre-pandemic peaks. Employment in September 2022 reached its highest level since 2010. Greece now reports one of the largest increases in labour shortages of EU countries, especially in sectors recovering strongly, such as construction. Year-on-year consumer price inflation reached 12.1% in September 2022, before slowing in October 2022 as energy prices eased. Inflationary expectations remain at historical highs especially in construction, services and retail trade.

Greece

1. Business confidence is an unweighted average of confidence indicators in industry, construction, retail trade and services.

2. Labour force participation rate, as a percentage of population aged 15-74.

Source: Eurostat; and OECD Economic Outlook 112 database.

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Greece: Demand, output and prices

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Food and energy supply disruptions and higher prices, amplified by the war in Ukraine, are reducing real incomes, with consumer energy prices increasing by 53% in the year to September 2022. Greece has adopted measures totalling 5.5% of GDP in 2022 to support households and firms against high energy costs, of which 3.6% of GDP are financed by the Green Transition Fund, mainly stemming from Greece’s mechanism of collecting windfall revenues in the wholesale electricity market. Greece is increasing imports of liquified natural gas, but has little storage capacity and is seeking storage agreements with neighbouring countries. It has already agreed with Italy to stock gas equivalent to 5% of its consumption during the first half of 2022. The government does not expect shortages in energy supply and has not announced a plan to ration energy supplies in the event of gas shortages. Monetary tightening and growing international uncertainty have led to increasing government bond yields. Spreads between Greek and German sovereign bond yields rose by more than in other euro area countries in the year to November. Average borrowing costs for businesses rose more slowly, however, partly reflecting banks’ improving access to loanable funds.

Fiscal measures are expected to provide continued support to the economy

The government plans to return to a modest primary surplus of 0.7% of GDP in 2023, implying a tightening fiscal stance and one of the largest fiscal consolidations among EU countries. Energy support measures in 2022 mostly reduce energy costs for households and firms via price subsidies with generous eligibility criteria. These add to support measures initiated during the pandemic, including cuts to social insurance contributions and tax rates, valued at 2% of GDP in 2022. The draft 2023 budget does not extend existing measures but provides a reserve of 0.5% of 2023 GDP for energy measures. Prolonged energy disruptions, leading to current energy support measures being extended to mid-2023, are projected to lead to fiscal costs of about 1% of GDP in 2023. Other substantial fiscal measures include making permanent social insurance and tax rate cuts adopted during the pandemic, and subsidies of home loan interest costs for young people. Fiscal costs for these amount to 1.6% of GDP in 2023.

High uncertainty and rising prices are projected to moderate growth

Rising prices and investment costs and unwinding fiscal support are projected to moderate economic growth. Consumption growth is projected to weaken as high inflation weakens households’ real incomes. Fiscal support to shield households from the rising cost of living is expected to expire from 2023. Strong growth in the costs of investment projects plus high uncertainty are expected to weigh on investment, even as the Greece 2.0 plan implements projects valued near 2.4% of GDP annually. Demand, while moderating, is rising faster than firms’ capacity, reinforcing capacity constraints and underlying price pressures. Headline inflation is projected to moderate as energy prices stabilise over the projection period and euro area monetary tightening takes effect, though the removal of energy price subsidies, expected in the second half of 2023, will lead inflation to rise temporarily. If energy supply disruptions or high prices continue beyond mid-2023 or are more severe than foreseen, consumption and production would weaken, and the public finances would come under greater pressure. Slower fiscal consolidation could risk delaying the upgrading of Greece’s sovereign debt to investment grade, leading to more expensive and scarcer access to finance. Stricter sanctions on Russian oil exports would curtail shipping receipts from Russia, which amounted to 1.6% of total shipping receipts in 2021. If wage growth becomes poorly coordinated as labour markets tighten, inflation could become more entrenched.

Well-designed fiscal measures can address both short- and long-term energy challenges

Limiting fiscal responses to high energy prices to well-targeted temporary support for vulnerable households would allow the government to rebuild some fiscal space and ease inflationary pressures as activity reaches capacity constraints. Shifting the main mechanism for wage adjustments from administrative increases in the minimum wage to broad and timely collective bargaining that reflect sectoral conditions and workers’ productivity would support real incomes and competitiveness, allow wage rates to better reward productivity, and mitigate inflationary pressures. Cross-country experience suggests that the new fiscal subsidy for home loan interest costs may raise house prices when new supply is constrained, with the effect of reducing access to home ownership. Allocating these resources to expand programmes that support access to higher-quality housing, such as for energy efficiency-improving renovations, would reduce households’ energy costs, address high levels of energy poverty and help Greece achieve net zero greenhouse gas emissions.