OECD Economic Outlook, Volume 2023 Issue 2

Greece

Growth is projected to slow from 2.4% in 2023 to 2.0% in 2024 before picking up to 2.4% in 2025. Real consumption growth has slowed due to high living costs and damage from recent weather events, but will pick up as gradually declining inflation and continued employment growth raise households’ purchasing power. Improvements in the business environment, increasing disbursements of European Union funds and strengthening global economic conditions will support investment and exports. The decline in headline inflation will be slowed by wage pressures arising from labour shortages.

Achievements in structural reforms and debt reduction have been reflected in Greece’s sovereign debt rating, which returned to investment grade in September 2023. With still low labour productivity, further reforms to remove obstacles to invest – notably in the justice system – and improve skills should be priorities to achieve higher living standards and ensure long-term fiscal sustainability. Recent wildfires and floods emphasise the need to adapt to a hotter climate, notably by broadening property insurance coverage.

Greece’s economy remains robust

GDP rose by 1.3% over the first two quarters of 2023. Private consumption was supported by expanding employment, which is at its highest level since 2010, and by slowing inflation. The rapid fall in the unemployment rate is contributing to rising wages; wage cost indices rose by 4.3% in the year to the second quarter of 2023. Headline inflation dropped to 3.8% in the year to October 2023 as energy prices eased. Real investment grew by 7.9% in the year to the second quarter of 2023, despite rising borrowing costs. Business expectations remained positive in October 2023 and purchasing managers’ expectations continued to point towards expanding demand. Forest fires and floods caused large economic damage in mid‑2023, especially among manufacturing and agricultural sectors.

Greece: Inflation and labour market indicators

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

Source: Eurostat; and OECD Economic Outlook 114 database.

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Greece: Demand, output and prices

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Euro area monetary policy tightening has slowed growth in new lending to households and firms, although it remains high. Improvements in Greece’s sovereign debt rating partly offset tightening international financial conditions: spreads to German 10-year government bonds have nearly halved since October 2022. Risks of energy supply disruptions have eased. Energy prices in October 2023 were 22% lower than the peak in September 2022. However, food prices, increased by 10.3% over the year to October 2023. Tourism exports have held up, but goods exports declined by 15% in the year to the second quarter of 2023.

The primary surplus will improve further

Greece is expected to achieve growing primary surpluses, from 1.1% in 2023 to 2.1% in 2025. This will contribute to a rapid decline in the debt-to-GDP ratio from 163% in 2023 to 152% in 2025. That said, the fiscal stance is expected to remain broadly neutral and tighten modestly by around 0.2% of GDP between 2023 and 2025. Growing tax revenues and the phase out of energy and food price subsidies, which amount to EUR 1% of GDP in 2023, create some fiscal space for new fiscal interventions according to the government’s budget. Measures worth 0.7% of GDP in 2023 and 1.1% of GDP in 2024 raise incomes of pensioners, civil servants, and low-income groups, though previous pension reforms are expected to contain public expenditures. Government compensation for damages from forest fires and floods is estimated at 0.3% of GDP in 2023. Clearing current delays in implementing investments from the Recovery and Resilience Fund will boost investment, with spending expected to rise from 1% of GDP in 2023 to 2% of GDP in 2025.

Growth is projected to recover slowly

Output growth is projected to moderate to 2.4% in 2023 and 2.0% in 2024 before picking up to 2.4% in 2025. The previous decline in purchasing power and damages from forest fires and floods are projected to initially slow consumption growth. Rising borrowing costs will temporarily weigh on investment. Both real consumption and investment growth are projected to pick up as inflation declines further and the external environment improves. Continued employment and wage growth will help rebuild households’ purchasing power. An improved business environment and continued support through Greece’s Recovery and Resilience Plan “Greece 2.0” are projected to spur investment. The decline in inflation is likely to slow as growing capacity constraints contribute to wage pressures. More persistent inflation, or renewed energy and supply disruptions, are key risks and would lower consumption and investment growth.

Boosting productivity and tackling climate change are key challenges

Despite the welcomed reductions in the public debt burden, the level of debt remains high. Achieving primary surpluses of at least 1.5% of GDP into the longer‑term and supporting strong growth are important for fiscal sustainability. Growth prospects would be improved by increasing the legal system’s effectiveness, for example by promoting alternative dispute resolution mechanisms. Bringing more women and young people into employment, for example by encouraging flexible working arrangements and increasing incentives to hire workers with limited experience, remains also key to bolster further improvements in potential output. Promoting broader property insurance for all buildings could limit the size of fiscal contingent liabilities arising from increasingly severe extreme weather events and help speed up rebuilding after damages.