Greece’s economy – although improving – is expected to see its seventh consecutive year of contraction in 2014. Support should come from a gradual stabilisation in consumer spending, strong growth in exports and a good performance in the tourist sector. Since 2009, GDP has declined by approximately 25%. After a series of reforms imposed by the international lenders, labour costs are estimated to have fallen by 25%. The budget deficit will be sharply cut in 2014 and 2015. The Greek economy grew fast during the two decades that preceded the current crisis. Between 1990 and 2009, the average growth rate in Greece was 3.1%. Greece's recession, however, was vicious and prolonged. In the years since 2007, more than a quarter of the economic output has been wiped out. Greece now has both the highest jobless rate and the largest debt relative to GDP in the EU.
Although Greece is a small economy accounting for less than 3.0% of total eurozone output, its heavy dependence on foreign borrowing has created problems far beyond its borders. The government, however, has managed a huge fiscal adjustment. Improvements in cost competitiveness have been substantial but all the changes have come with a large dose of harsh austerity. Greece has had to slash wages, pensions, prune the public sector and raise taxes in order to make its economy competitive.
Real GDP is expected to fall by 0.3% in 2014 after a contraction of 3.9% in 2013. Thus, Greece's economy – although improving – will see its seventh consecutive year of contraction. Support should come from a gradual stabilisation in consumer spending, strong growth in exports and a good performance in the tourist sector. Since 2009, GDP has declined by approximately 25%.
Prices fell by 0.9% in 2013, and are expected to slide by a further 1.0% in 2014.
Increased absorption of EU structural funds should help to sustain public investment. In late 2013, construction companies are expected to begin work on 6.0 billion euro of highway projects financed by the EU.
Average incomes have fallen by 35% in the past four years, signifying a huge drop in Greek living standards. The downward trend, coupled with a sharp drop in wages, puts great pressure on household spending. Not surprisingly, the real value of private final consumption fell by 6.6% in 2013 and a decline of 0.8% is expected in 2014.
Unemployment was 27.3% in 2013 and it is ex-
pected to edged down to 27.2% in 2014. Unemployment among young adults stands at 56.9%. Almost half of the unemployed in the country have been without work for a year or more. After a series of reforms imposed by the international lenders, labour costs are estimated to have fallen by 25%.
Evaluation of market potential
The recovery should gather strength in 2015 as investment strengthens and growth should accelerate in later years. Additional support should come from tourism, exports and gradual improvements in domestic demand. Greece needs annual growth of 3.0% per year in 2015-2020 to make its debt affordable.
Domestic demand will continue to be weak owing to the austerity programme. This means growth prospects depend heavily on investment and exports. Labour reforms, are reducing the competitiveness gap, which the IMF estimates, was cut by nearly two-thirds in 2010-2013. The output gap will not be closed before 2020. In the long term, the IMF forecast annual growth of about 1.8% per year.
Exports represented only 15.1% of GDP in 2013. This is the lowest export ratio in the EU. IMF economists estimate that Greece needs a 30-40% decline in real wages to restore its competitiveness.
In 2013, exports (in dollars) grew by 2.8% and growth of 10.1% is forecast for 2014. Wagesetting reforms have significantly contributed to gains in competiveness.
Greece's exports mainly go to other European countries which accounted for 67.0% of the total in 2013. Exports of basic manufactures made up 13.8% of all exports in 2013 while food and live animals accounted for 13.0% of the total. Mineral fuels also make up a surprising share of the total (40.1% in 2013) but this has been attributed to a correction of previous statistical omissions according the statistical office. Greece's current account recorded a small surplus of 0.8% of GDP in 2013 as imports declined substantially. A deficit equal to 0.1% of GDP is expected in 2014.
Rigidities in the domestic market undermine competitiveness and limit gains in productivity. Many industries are oligopolistic in character – a characteristic which keeps profits high and slows the growth of productivity. Poorly functioning institutions and extensive regulations discourage foreign investment while state enterprises are notoriously inefficient.
Regulations governing employee protection and mass dismissals have been relaxed. Approximately 4,500 public entities and agencies have been closed or merged since the austerity programme began. A number of restrictions on the retail sector have been removed, allowing a wider class of goods to be sold by retailers, and reducing retailers' operating costs.
Officials intend to streamline the privatisation process and to remove it from political interference. The government has planned to privatise some state-owned concerns and to sell real estate and property that belongs to the state in an effort to boost government revenues. In June 2013, Greece failed to attract any binding bids for its natural gas company, making it unlikely to meet privatisation targets for the year under the EU/IMF bailout.
Economists estimate that between 30% and 40% of the activity in the Greek economy that is subject to the income tax goes unrecorded. The country has an estimated 60 billion euro in unpaid taxes. The government hopes to raise almost 12 billion euro by restructuring tax operations and cracking down on tax evasion. Another 50 billion euro could be raised by selling state-owned enterprises such as ports, airports, motorways, a major power supply and a telecommunications company.