The Bank of Greece expects the Greek economy to grow by 2.2% in 2024, with a slight downward revision of previous estimates of 2.3% (recall that the government's forecast is 2.5%), with an acceleration to 2.5% in 2025 and a slight decline to 2.3% in 2026. 

The main drivers of economic activity in the coming years will continue to be investment, private consumption, and exports, while the contribution of public consumption is expected to be marginally negative.

The BoG previously predicted 2.8% inflation this year, which is down from 4.2% in 2023 and reflects the sharp decline in energy prices and the slowing of food inflation.

Over the medium term, inflation is expected to converge towards the ECB's 2% target but remain slightly above it. Services inflation is expected to be the most persistent relative to inflation in other components, mainly reflecting expected increases in labour wages. Core inflation is expected to fall significantly to 3.3% in 2024 and to 2.4% in 2025 as a result of a deceleration mainly in non-energy industrial goods inflation.

IN PARTICULAR

The global economy in 2023 proved more resilient than expected, despite the tightening of monetary policy to combat high inflation and the gradual withdrawal of extraordinary fiscal support measures. Developments varied across advanced economies during 2023 and in early 2024. The credibility of monetary policy in achieving the inflation target and the rapid recovery of aggregate supply following the pandemic and energy crises have driven down inflation since mid-2022. The euro area economy rebounded in the first quarter of 2024 after posting negative growth in the fourth quarter of 2023. Headline and core inflation continued to fall in the first months of 2024, while medium- and long-term inflation expectations have declined. Against this background, in June 2024, the Governing Council of the European Central Bank (ECB) decided to lower the three key policy rates by 25 basis points. At the same time, it indicated that it would keep policy rates sufficiently restrictive for as long as necessary to ensure that inflation returns to its 2% medium-term target.

Amid this environment, the Greek economy will continue to grow in the course of 2024 at a satisfactory pace. Headline inflation keeps falling, the labour market remains strong and fiscal aggregates are improving.

REAL ECONOMY

In the first quarter of 2024, the Greek economy grew by 2.1% year-on-year. The key drivers of growth were private consumption and, to a lesser extent, investment, while government consumption dropped markedly. Net trade had a negative contribution to GDP, as exports of goods declined considerably and imports of goods and services increased.

The Harmonized Index of Consumer Prices (HICP), which measures inflation, averaged 4.2% in 2023, down from 9.3% in 2022. Strong disinflation is attributed solely to the energy component. On the other hand, core inflation (HICP excluding unprocessed food and energy) edged up to 6.2% in 2023 from 5.7% in 2022.  According to available data for the first five months of 2024, food, non-energy industrial goods and services inflation has fallen considerably from the corresponding 2023 levels. Moreover, energy inflation remains in negative territory.

FINANCIAL CONDITIONS

A significant improvement can be observed in the financing conditions of the Greek sovereign and banks on international bond markets, along with a strong rise in share prices. Underlying this were expectations of further policy rate cuts in the course of 2024, as well as the upgrade of Greece’s sovereign credit rating to investment grade. In this connection, it should be noted that these rating upgrades have contributed to a proportionally greater reduction in Greek government bond yields. Meanwhile, due to the Greek economy’s improved creditworthiness and positive outlook, there has been growing investor participation in the new issues of Greek government bonds, putting downward pressure on borrowing costs.

At the same time, the outlook for banks’ credit ratings is positive, and the first upgrades of systemic banks to investment grade have already taken place. This reduces Greek banks’ funding costs on international markets, benefiting their net interest income. The yields of bonds issued by Greek non-financial corporations remained broadly unchanged in 2023, as the gains from successive credit rating upgrades of Greek government bonds largely offset upward pressures from policy rate hikes.

Interest rates on time deposits have stopped rising since the fourth quarter of 2023 and remained virtually unchanged in the first four months of 2024. After an overall annual increase of EUR 5.8 billion in 2023, the stock of private sector deposits fell by a cumulative EUR 4.2 billion in the first four months of 2024, declining more strongly than in the same period last year, to stand at EUR 190.7 billion in April 2024.

The weighted average cost of bank borrowing for non-financial corporations (NFCs) has stabilised at 10-year highs, with differences across loan categories, as certain loan categories have seen declines (e.g. corporate loans of up to EUR 250,000). The weighted average cost of bank borrowing for households increased during 2023 but showed a small decline after the beginning of the current year.

Despite slowing down, the annual growth rate of bank credit to NFCs remained fairly high until the end of 2023 before picking up in the first four months of 2024. The European Investment Bank (EIB) Group, the Hellenic Development Bank (HDB), and the Recovery and Resilience Facility (RRF) all offer business loans. In the first four months of 2024, about 20% of all new loans with an agreed maturity to NFCs were business loans.

BANKING SYSTEM

The solid performance of the Greek economy and the upgrade of Greece’s credit rating to investment grade in 2023 have had positive effects on the domestic banking system. So far this year, two systemic banks have been upgraded to investment grade, and more upgrades are expected to follow as credit rating agencies have changed the outlook of Greek systemic banks to positive. In this benign environment, the Greek banking sector’s profitability, liquidity and capital adequacy ratios increased in 2023 and in the first quarter of 2024, amid high key interest rates and favourable domestic economic conditions.

The profitability of Greek banks improved on the back of higher core profitability, with total net interest and fee income rising substantially, while the increase in operating expenses was milder and loan-loss provisions did not show any considerable change. Compared with end-2022, the capital adequacy ratios of Greek banks were higher in December 2023 as well as in the first quarter of 2024, mainly reflecting increased core profitability and the issuance of eligible capital instruments. In the first quarter of 2024, the quality of the loan portfolio of Greek banks deteriorated, mainly due to the recognition of certain government-guaranteed loans as non-performing.

According to Bank of Greece forecasts, the Greek economy is expected to maintain its growth momentum in the years ahead. Economic growth is projected to be 2.2% in 2024, accelerate to 2.5% in 2025 and moderate slightly to 2.3% in 2026. The main drivers of economic activity in the coming years will continue to be investment, private consumption and exports, while the contribution of government consumption is expected to be marginally negative.

HICP inflation is expected to fall significantly over the next two years. In 2024, it is projected at 3.0%, down from 4.2% in 2023, reflecting large declines in energy and food inflation. Over the medium term, inflation is expected to converge towards, but remain slightly above, the ECB’s target of 2%. Services inflation is expected to be more persistent than the other inflation components, mainly reflecting expected wage increases. According to projections, core inflation will significantly decline to 3.3% in 2024 and 2.4% in 2025, primarily due to falling non-energy industrial goods inflation.

RISKS

Risks to the Bank of Greece’s growth forecasts are mainly tilted to the downside. Downside risks to the outlook of the Greek economy include: (i) a worsening of the geopolitical crisis in Ukraine and the Middle East and the resulting impact on the international economic environment; (ii) a lower-than-expected rate of absorption and disbursement of RRF funds; (iii) possible natural disasters linked to the effects of the climate crisis; (iv) a tightening labour market; and (v) delays in the implementation of reforms, which would slow down the process of enhancing the productivity of the economy and the competitiveness of enterprises. On the upside, the Greek economy will be positively affected if tourism revenues again exceed expectations.

CHALLENGES

Disinflation: Putting headline inflation (in particular food inflation) on a steady downward course is a key challenge for the economy and requires an enhancement of competition in product markets. Constantly rising, albeit at a slowing pace, food prices take a heavy toll on household incomes, as food is a basic necessity with inelastic demand.

High public debt as a percentage of GDP: The government debt-to-GDP ratio has been on a downward path in recent years but is still the highest in the European Union (EU). The favourable repayment profile of official sector debt only provides a unique window of opportunity for government debt to continue declining rapidly during a period when the loans granted under the adjustment programmes gradually mature and are replaced by new borrowing on market terms.

Further improving the fundamentals of the banking system and addressing the private debt overhang: Despite improvements in profitability and capital base, challenges remain to banks’ ability to achieve sustainable profitability by supplying more credit to the economy as monetary policy eases further. At the same time, deferred tax credits continue to make up a large part of banks’ capital. Moreover, the overall stock of non-performing loans held within and outside the banking system remains high, which constrains new borrowing capacity.

Large investment gap: The persistently low level of productive capital accumulation has been a major obstacle to productivity growth and convergence with the EU average. In particular, Greece has witnessed a sizeable investment gap vis-à-vis the EU since the sovereign debt crisis (in 2023, Greece: 14.3%, EU average: 22.0%). Based on a recent European Investment Bank survey for 2023, the most important factors behind low investment in Greece were uncertainty about the future, high energy costs, the unavailability of skilled staff, excess business regulations, and high external financing costs.

Chronic labour market weaknesses: Despite a marked decrease in unemployment, the overall unemployment rate as well as the unemployment rates of women and youth remain well above the EU averages. Moreover, there are job mismatches, as businesses find it difficult to hire suitable workers to meet their needs. At the same time, the labour force participation rate, although it has risen in recent years, remains low relative to the EU average, especially among women, young people, and persons with disabilities. The low participation rate can act as a drag on the further growth of the Greek economy as well as on social cohesion.

Negative external balance and high negative international investment position: The current account deficit, despite declining in 2023, is projected to remain above 5% of GDP over the medium term, mainly due to increased imports linked to the implementation of RRF-related investments. As a result, the country’s net international investment position (IIP), i.e., its accumulated external debt, is negative (around -141% of GDP), in contrast to other euro area high-debt countries that largely rely on domestic borrowing.

Housing market tightness: The substantial and ongoing increase in property prices, which also leads to higher rental prices, poses a significant challenge to the average household, as it makes a home purchase unaffordable and pushes up housing costs, especially for young couples. This increases social inequality and has negative repercussions on family planning, potentially also negatively affecting the birth rate.

Low structural competitiveness: Greece’s ranking in composite indicators of structural competitiveness improved in 2024, but the business environment is still less attractive than in most EU countries. In particular, the speed of justice, bureaucracy and inefficiency in some areas of public administration (e.g., property transfers, spatial planning, and the completion of the National Cadastre) remain worse than in other EU countries.

Medium-to-long-term challenges: Finally, major medium-to-long-term challenges are population ageing, tackling climate change and the energy transition.

Given the uncertainties and risks stemming from the international economic environment and the pre-existing but also new challenges facing the Greek economy, such as the green and digital transitions, the climate crisis, and the utilisation of artificial intelligence, it is essential that economic policy remain committed to implementing the changes that will ensure faster economic growth and social cohesion.

RECOMMENDATIONS

1. Implementation of policies to ensure a sustained decline in inflation, in particular food and service inflation, which, although now on a downward trajectory, remains high. In this respect, domestic economic policies should be supportive to the single monetary policy and not generate inflationary pressures. At the same time, increases in goods and services prices and wage growth should be consistent with the medium-term inflation target. In the short term, the competent authorities should step up supervision to ensure that competition is respected and, where necessary, impose administrative sanctions. In the medium term, all barriers to competition in the goods and services markets need to be removed through appropriate national and European initiatives.

2. Timely absorption and disbursement of RRF resources to the private sector is key to achieving the projected growth rates of gross fixed capital formation over the period 2024–2026.

3. Implementing, as a matter of priority, reforms aimed at eliminating structural weaknesses, such as delays in the delivery of justice, red tape in public administration, and the digital gap.

4. Achieving sustainable primary surpluses through a growth-friendly fiscal policy. In order to achieve the required reduction in the government debt-to-GDP ratio, cyclically adjusted primary surpluses of 2% of GDP per year need to be maintained. However, as a key condition, the efficiency of public spending should be improved through better targeting of social spending so as to increase public investment and education and health expenditures, which have a particularly positive effect on medium-to-long-term real GDP growth. At the same time, priority should be given to broadening the tax base by combating tax evasion.

5. Further strengthening the resilience of the banking sector. There is a need to further strengthen the resilience of the banking system, including by quantitatively and qualitatively improving the capital base of Greek banks and further reducing NPLs within and outside the banking system. Moreover, boosting competition in the domestic financial system by strengthening non-systemic and cooperative banks could improve the financing conditions of the real economy.

6. Tackling structural problems in the labour market. Education, in particular technical education and lifelong learning, plays an important role in matching workers’ skills to labour market needs. To close the critical labour and skills gap in the domestic labour market, it is important to integrate migrants as well as introduce incentives to reverse the brain drain and increase the labour force participation of women, youth, people with disabilities, older workers, and pensioners.

7. Implementing policies aimed at increasing household savings. These include: (a) development of the capital market; (b) provision of targeted tax incentives in order to boost saving in capital market products, coupled with measures to promote financial literacy; (c) strengthening the funded character of the first pillar of the pension system (social security); and (d) strengthening the third pillar of the pension system (private insurance).

8. Attracting foreign investment funds. The implementation of reforms to improve the business environment and the functioning of the public sector will help attract inflows of foreign investment funds. These funds, insofar as they concern foreign direct investment and are channelled to productive sectors of the economy, will help not only to finance the domestic savings-investment gap but also to upgrade the country’s productive capacity and diffuse new technologies and production organisation methods, with positive medium-to-long-term effects on the Greek economy.

9. Ensuring citizens’ access to affordable housing. Measures are needed to facilitate home acquisition and to boost the supply of affordable housing, especially in large, densely populated urban centres.

10. Promoting all available forms of private investment financing, including better access to capital markets to help small and medium-sized enterprises (SMEs) meet their investment needs, in particular start-ups and innovative SMEs that do not have sufficient tangible assets to offer as collateral