Greece's economic outlook has improved significantly, with real GDP strengthening beyond the trends recorded before the pandemic, the IMF underlines in its post-mission conclusions.
It said the public debt-to-GDP ratio has fallen below pre-pandemic levels, with limited financing risks over the medium term due to the favourable structure.
The banking system has remained resilient and is improving balance sheets. However, the Greek economy faces macroeconomic challenges amid significant interest rate hikes, persistently high inflation and rising house prices.
Structural imbalances arising from low household savings and the low level of investment weigh on medium-term growth prospects. Achieving higher and greener growth and ensuring fiscal sustainability while preserving financial stability requires the right policy mix, aiming at continuing growth-friendly consolidation, strengthening the resilience of the financial system and accelerating pro-growth reforms.
Strong recovery amid high inflation
1. Economic activity remained strong in 2023. Real GDP continued to grow at a steady pace in the first half of 2023 of 2.5% (at a seasonally adjusted annualised rate). Private consumption strengthened on the back of rising real wages and a gradual reduction in excessive household savings caused by the pandemic.
Investment growth remained strong due also to the Recovery Fund. Sentiment indicators suggest that overall economic momentum remained strong in the third quarter despite a series of natural disasters (heat waves, fires and floods).
The unemployment rate fell to 10% in September, a decade low. Inflation and the structural index slowed to 3.8% and 3.6% respectively in October, due to a normalisation of energy prices and base effects, but remain high amid a tightening labour market. House prices have risen by more than 50% since bottoming out in 2017, but still remain below levels prior to the global financial crisis.
2. The necessary continued progress in structural reforms has improved investment and productivity growth. Good progress has been made in the digital transformation of the economy, including the integration of various government services. Labour market reforms, such as the modernisation of labour legislation and public services, have facilitated labour market adjustment in the aftermath of the pandemic. The actions of the strengthened Competition Commission have contributed to increased market competition. Based on this progress, Greece's potential growth is estimated to have turned positive in 2022, for the first time since the sovereign debt crisis.
3. The banking system has remained resilient, supported by ongoing policies to strengthen institutions' balance sheets. Asset quality improved further, with the NPL ratio falling below 5% in the second quarter at systemically important banks, supported by ongoing securitisation under the Hercules programme. The lower NIM ratio, combined with higher net interest margins, contributed to a strong recovery in bank earnings, strengthening capital adequacy. Amid continued deposit inflows driven by strong growth, the banking system also maintained substantial liquidity buffers despite significant repayments of the ECB's targeted long-term refinancing operations (TLTROs).
4. Real GDP is projected to grow by 2.5% and 2.0% in 2023 and 2024, respectively, before moderating in the medium term. Private consumption will be supported by real wage growth, while investment activity will continue to expand with the implementation of the National Recovery and Resilience Plan (NRRP). However, following the expiration of NGEU financing in 2026 and still low potential growth, GDP growth is projected to moderate to around 1.25% over the medium term. Inflation is projected to ease to 2 percent by end-2025, as pressures on structural inflation will gradually ease, despite the continued normalization of food and fuel prices.
5. Risks are more balanced for growth but tilted to the upside for inflation. A possible escalation of the Russia-Ukraine war and conflict in the Middle East could disrupt trade and put new pressures on energy and food prices.
Growth-friendly Fiscal consolidation
6. Growth-friendly fiscal consolidation can further enhance the sustainability of public debt while supporting inclusive growth and green growth. With very high debt levels, continued fiscal convergence, with the primary surplus rising to 2.1% of GDP in 2024 from a projected 1.1% in 2023, would help reduce the debt-to-GDP ratio while limiting additional inflationary pressures.
Amid strong revenue growth, maintaining a primary surplus of around 2% over the medium term would further improve debt sustainability while providing additional room for public investment and critical social spending. This would help reduce Greece's large investment gap, while keeping the public debt-to-GDP ratio firmly on a downward path.
7. Containing expenditure pressures is crucial to preserve fiscal space for critical social and capital spending.
There is a need to resist spending pressures in non-discretionary areas, such as public sector wages and pensions, which remain at high levels compared to other countries. On the contrary, investment needs are high, including for green and digital transition. Critical social spending such as targeted social transfers, healthcare and education should be protected or expanded for more inclusive and inclusive growth. Continued efforts to strengthen the social safety net, including through a single gateway to benefits, will better protect the vulnerable.
8. Promoting fiscal structural reforms will strengthen fiscal governance and improve the effectiveness of fiscal policy. The authorities' continued efforts to tackle tax evasion, including targeted reforms for the self-employed, are important and welcome. Continued efforts to promote digital transactions and streamline tax incentives will improve the efficiency of revenue collection. Given the planned large investment under the NRRP, public investment management should be further strengthened.
Ensuring financial stability
9. The monitoring and management of risks related to interest rates, liquidity and funding, and credit exposures should be strengthened, supported by a strong bank capital base. The appropriateness of risk management strategies should be closely monitored in a high interest rate environment for a longer period of time. Supervisors need to monitor and stress test bank funding and liquidity conditions, as the replacement of TLTROs with more expensive market funding may pose challenges. Proactive credit risk management is required to ensure that banks maintain comfortable capital buffers. Supervisors should also ensure that banks adjust their business models to ensure sustainable profitability, while temporarily increased profits should be used to build capital buffers and restore capital quality.
10. The macroprudential policy toolbox should be further strengthened and used more actively to enhance the resilience of the banking sector. By complementing organic capital deployment and securities issuance, the activation of a positive neutral countercyclical capital buffer would help banks to protect themselves from potential systemic shocks. In mortgages, measures such as caps on the loan-to-value ratio and the loan-to-income ratio would enhance household resilience and thus limit vulnerabilities in the banking system against a possible housing credit boom.
Implementing reforms for higher and greener growth
11. Comprehensive reforms to address structural supply-side constraints will remove medium-term growth prospects while easing inflationary pressures.
Accelerate regulatory reforms to support business. Regulations should be streamlined to facilitate the entry and exit of firms and job movements across sectors, which will help improve business dynamism and productivity. The authorities' current digitisation efforts could improve the focus on serving SMEs to maximise economic and employment benefits.
12. Concerted efforts are needed to achieve the ambitious climate and green transition objectives of the authorities. Given the dominance of fossil fuels in energy, a strong implementation of the renewable energy policy framework, including measures to streamline the licensing framework for new investments and better integration of renewables into the electricity grid, would accelerate progress while enhancing energy security.
The authorities should consider increasing the carbon tax (including excise duties and fees) in sectors such as transport to further incentivise a rapid and efficient green transition as the energy price continues to normalise.
