Greece

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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.

Eco­nomic prospects

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.

For­eign trade

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.

Busi­ness en­vi­ron­ment

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.

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