by Economic activity will slow in 2023 and contract further in 2024, according to the Commission’s spring economic forecast report, published today.
However, the report notes that economic activity in Greece is expected to grow by 2.4% in 2023. The output expansion is supported by a resilient labor market and the implementation of the Recovery and Resilience Fund.
Headline inflation averaged 9.3% in 2022, but is expected to decline to 2.4% by 2024 as energy prices decline. While remaining negative, the general government balance sheet deficit continues to narrow, thanks to improved revenue collection. Public debt is expected to decline further.
In Europe, the economy continues to show resilience in a challenging global environment. Lower energy prices, easing supply constraints and a strong labor market supported modest growth in the first quarter of 2023, dissipating fears of a recession. This better than expected start to the year improves the growth prospects of the EU economy. 1% in 2023 (0.8% in the winter interim forecast) and 1.7% in 2024 (1.6% in the winter intermediate forecast). Upward revisions for the Eurozone, which are of similar size, with GDP growth, are now expected at 1.1% and 1.6% in 2023 and 2024 respectively.
In a context of persistent tensions, core price inflation has also been revised upwards, compared to winter, to 5.8% in 2023 and 2.8% in 2024 in the euro area.
In Greece, economic activity will slow in 2023 and contract further in 2024
Specifically for Greece, the report states that, despite the energy crisis and related inflationary pressures, throughout the year the Greek economy grew by 5.9% in 2022. Strong private consumption, significant investment activity and the impetus given by the recovery of tourism, during the summer period, contributed to the strong growth. Furthermore, real GDP grew significantly in the last quarter of 2022, despite widespread price pressures, implying a large carry-over effect to 2023.
Real GDP should grow by 2.4% this year, thanks to both domestic and external demand. However, private consumption growth is expected to slow significantly from last year’s post-pandemic recovery, amid a loss of real household disposable income and a new negative savings rate. Continued implementation of the Fund shifts from reforms to investment and should therefore support capital spending, particularly in construction and to a lesser extent in equipment, partly offsetting the impact of tighter conditions. funding.
The full recovery of international tourism to pre-pandemic levels is expected to boost Greek exports. Given weak domestic demand, import growth is expected to moderate. However, the trade deficit is and is expected to remain high, despite lower energy prices and the positive terms of trade impact.
In 2024, economic growth is projected at 1.9%, gradually converging towards longer-term growth. Investment is expected to remain a key contributor to output growth, albeit at a slower pace than in 2021-23, while household spending is expected to be supported by rising real incomes.
Resilient labor market amid rising wage pressures
The labor market has improved significantly in 2022 in a context of sustained job creation. Even though people have continued to return to the labor market after the pandemic, which means an increase in the labor force, the unemployment rate has fallen to 12.5% and is expected to fall to 11.8% by 2024 Despite the expected recovery in wage growth this year and beyond, real wage growth is not expected to turn positive until 2024.
Slower inflation due to lower energy prices
Headline inflation averaged 9.3% in 2022, but eased to 6.3% in the first quarter of 2023. Price pressures are expected to ease further this year, thanks to lower prices Energy. Consumer prices are expected to increase by 4.2% and 2.4% in 2023 and 2024 respectively. However, the delayed pass-through of high energy and food prices to services and non-energy industrial goods, which became more visible from the last quarter of 2022, will drive core inflation higher in 2023. increase of the minimum wage by 9.4% in April 2023, the risks of a price-wage spiral seem to be diminishing.
However, upside risks to the inflation outlook stem from faster wage adjustment which could fuel higher core inflation.
The return to the primary surplus came sooner than expected
The general government deficit in 2022 turned out to be significantly lower than expected, standing at 2.3% of GDP against 4.1% of GDP forecast in the fall. The primary balance recorded a surplus of 0.1% of GDP. This improvement is mainly due to better than expected tax revenues, notably from value added tax and direct taxes.
After the better than expected outcome in 2022, the general government deficit is expected to narrow further to 1.3% in 2023. This can be attributed mainly to the phasing out of the remaining pandemic-related measures (which are estimated to increased to 1.5% of GDP in 2022) and the significant reduction in the cost of measures to mitigate the economic and social impact of high energy prices (from 2.5% of GDP in 2022 to 0.2% of GDP in 2023). At the same time, the increase in wages and state social benefits should remain moderate. The forecast also takes into account two temporary measures introduced in response to inflationary pressures with an estimated budgetary cost of 0.3% of GDP: (a) a voucher of €35 per month for the period from February to July 2023 for households meet certain income conditions and (b) a lump sum retirement benefit for retirees whose pension is not currently adjusted.
The general government deficit is expected to decline further to 0.6% of GDP in 2024, implying a primary surplus of 2.5%. The improvement in the fiscal balance is due to the phasing out of the remaining energy-related measures until 2024. Despite the planned wage reform, with an estimated fiscal impact of 0.2% of GDP for 2024, public expenditure should remain moderate overall, improving the balance.
The public debt-to-GDP ratio fell sharply in 2022, mainly due to nominal GDP growth. The ratio is expected to decline further to 160.2% of GDP in 2023 and 154.4% of GDP in 2024, supported by primary surpluses and economic growth.
The fiscal outlook remains subject to upside and downside risks. In particular, downside risks arise from ongoing court cases, primarily the court cases against the state-owned real estate company (ETAD). On the other hand, if tax compliance continues to improve, revenues could turn out to be higher than currently expected.
