The Bank of Greece forecasts growth of 2.3% for 2024, acceleration to 2.5% in 2025, and a slight decline to 2.3% in 2026 and 2% in 2027 for the Greek economy, according to the Interim Report on Monetary Policy 2024, which was submitted today to the President of the Parliament and the Council of Ministers.
Inflation is expected to move towards the ECB's target of 2% by 2026, while the BoG identifies risks to the economy mainly in geopolitical developments, the rise of protectionism, and the rate of absorption of Recovery Fund funds. The central bank's policy recommendations focus mainly on the timely absorption and effective use of EU funds but also on addressing the inherent weaknesses of the Greek economy with measures to boost productivity and extroversion.
According to the Bank of Greece, the main component of economic growth is expected to be consumption, while investment and exports will continue to make a positive contribution. Overall, the net contribution of the external sector to GDP will be slightly negative in the coming years, as strong investment activity and strengthening consumption are expected to cause imports to increase at a pace similar to that of exports.
Inflation, based on the Harmonised Index of Consumer Prices (HICP), is expected to be 3.0% in 2024, down from 4.2% in 2023, reflecting the sharp slowdown in food inflation. By 2026, inflation will converge towards the ECB's target (2%) but remain slightly above it. Services inflation is expected to be more persistent than inflation in the other HICP components, mainly reflecting expected increases in labour wages. Finally, core inflation is expected to fall significantly to 3.5% in 2024 and 3.1% in 2025, reflecting the deceleration of mainly non-energy industrial goods inflation.
Risks and uncertainties
The risks surrounding the Bank of Greece's macroeconomic growth projections are mainly downside hazards and are associated with: (a) any worsening of the geopolitical crisis in Ukraine and the Middle East and its impact on the international economic environment; (b) strengthening of trade protectionism internationally; (c) lower than expected rate of absorption and utilization of RRF funds; (d) intensifying labor market tightness and potential wage pressures; (e) slower than expected implementation of necessary reforms; and (f) potential natural disasters due to the climate crisis.
Progress
The Greek economy has achieved remarkable successes in recent years and has proven to be highly resilient to various external shocks, such as the COVID-19 pandemic, the energy crisis and the war in Ukraine and the subsequent rise in inflation, the BoE stresses. The growth rate of the Greek economy is higher than the corresponding EU average from 2019 onwards, resulting in an acceleration of the real convergence of GDP per capita with the European average. Employment is growing, and the unemployment rate has fallen to single-digit levels despite a very significant increase in the minimum wage. As a consequence, disposable income is rising, and the share of the population at risk of poverty and social exclusion has fallen between 2019 and 2023. The prudent fiscal policy pursued in recent years and efforts to fight tax evasion are paying off, as high primary surpluses are achieved without the need for restrictive measures and public debt as a share of GDP is decelerating.
The positive performance of the economy in recent years has resulted in an upgrade of the Greek government's credit rating to investment grade. The confirmation of the progress made is also reflected in the recent upgrade of the Greek government bond rating to BBB from BBB-by Scope Ratings.
Challenges
The successes recorded in recent years are an indication that the economy is on the right track. However, the economic recovery effort from the 10-year debt crisis is not complete, the Interim Report noted. In real terms, both GDP and GDP per capita are still below pre-crisis levels, and convergence with the European average requires even stronger growth rates.
In addition, several domestic structural weaknesses, some of which predate the debt crisis, remain. For example, the lack of competition in several sectors of the economy, which exacerbates the international problem of price stability, high public debt, a large investment gap, low savings, low structural competitiveness, which worsens the current account balance, low labour force participation rates of women and youth, and an ageing population, which exacerbate the tightness of the labour market over time, are factors that limit the growth potential of the economy.
These domestic weaknesses are compounded by global challenges, such as the intensification of geopolitical conflicts, geo-economic fragmentation and the resurgence of the trend towards trade protectionism, the climate crisis, energy security, the transition to a sustainable and circular economy, and the onslaught of new digital technologies, in particular artificial intelligence.
Policy proposals
In view of the above, economic policy should remain committed to safeguarding fiscal credibility and stability and to implementing the necessary investments and reforms envisaged in the National Recovery and Resilience Plan 'Greece 2.0', which will facilitate the green and digital transition of the economy and accelerate the pace of growth in the coming years. At the same time, this will ensure a gradual improvement in the credit rating of the Greek economy.
However, while the timely absorption and effective use of RRF resources is crucial for the economy's performance in the coming years, it is not sufficient to make up for the lost ground of the 10-year debt crisis. Consequently, additional actions are needed to address the inherent weaknesses of the Greek economy and to achieve sustainable economic growth, the BoE notes.
Indicatively, demographic ageing is expected to shrink the share of the working-age population. This requires the adoption of active policies and labour market education and training programs aimed at increasing the participation of women and young people in the labour force. At the same time, however, targeted policies on the integration of immigrants and the attraction of foreign workers are needed to address the already existing labour shortages in the agricultural sector and in the tourism and construction-related sectors.
Given the constraints imposed by demographic developments, an increase in labour productivity is needed to maintain growth momentum. Increased investment is a key factor in boosting labour productivity. This requires the full absorption and productive use of available European resources. At the same time, it also requires strengthening the banking sector so that it can meet existing challenges and effectively finance investment and economic growth. Therefore, vigilance is needed to achieve further consolidation of banks' assets and to avoid new net inflows of non-performing loans. In the same context, it is particularly important to diversify funding sources by expanding microcredit and access to alternative forms of financing through capital markets to meet the investment needs of SMEs, especially start-ups and innovators, which do not have collateral to obtain bank loans.
Environmental challenges and climate change make it particularly important to improve the overall productivity of the factors of production, as it allows for maintaining or increasing living standards while protecting natural resources and the environment.
In order to enhance the overall productivity of the economy, it is necessary to improve education and training, especially in new technologies, in order to increase human capital. In addition, labour and capital markets should operate in such a way that the most productive firms in each sector are able to attract most of the labour and capital. This process ensures that the best firms thrive while the least efficient ones exit the market. This is the so-called 'distributive efficiency', which implies an increase in overall productivity and economic progress. Conversely, if labour and capital remain in relatively unproductive firms, the economy and productivity gradually decline. This can occur if, for example, the labour market is characterised by excessive regulation, if unviable firms continue to operate thanks to favourable regulations or barriers to entry for new firms, or if new, more dynamic firms have difficulty accessing finance.
Addressing other issues that hinder the efficient allocation of resources is also vital for long-term growth. Such issues include polygamy and maladministration, delays in the administration of justice, an unclear spatial framework, poor linkages between education and the labour market, infrastructure deficiencies, high electricity costs, a high tax burden on labour income, and increased indirect taxes.
In addition, there is a need to strengthen the extraversion of the economy, as access to the global market gives firms the opportunity to exploit economies of scale and strengthen their technological content, while international competition tends to reward the most productive firms.
However, in addition to the above, the improvement in overall productivity comes from increased productivity achieved at the firm level through the adoption of better technology, improved management practices and innovative processes. Therefore, firms that adopt cutting-edge technologies and attract top talent can significantly improve their productivity. However, in addition to the actions of the firms concerned, public intervention through subsidies and tax incentives is needed to encourage the creation of an innovation ecosystem with partnerships between firms, research institutions and universities to promote basic research and its commercialisation.
