SUSTAINABLE ECONOMIC GROWTH
The Investor Greece 2022 I Economy I Overview
“IN 2022, GREECE HAS RECEIVED €4.85 BILLION IN FDI NET INFLOWS, A NEW RECORD REPRESENTING THE HIGHEST NEW INFLOW OF FDI SINCE 2002. COMPARED TO 2020, NET FDI INFLOWS WERE 72.3% HIGHER AND 8.1% MORE THAN IN 2019, ANOTHER RECORD YEAR.”
The Covid-19 pandemic plunged Europe into the greatest recession since World War II, the second in the space of 12 years. The EU economic policy response was different this time, from the prompt launch of the ECB’s Pandemic Emergency Purchase Programme (PEPP), and the activation of the general escape clause of the Stability and Growth Pact (SGP), to the launch of the Support to mitigate Unemployment Risks in an Emergency (SURE) and the Next Generation EU (NGEU) programme with its Recovery and Resilience Facility (RRF).
The introduction of these policy responses was accompanied by a marked shift in the framing of the challenge facing EU member states. Instead of attributing the varying capacity of member states to deal with the pandemic to past more vs. less prudent policies, it was acknowledged that all countries were facing symmetric external threats (the pandemic but also climate change). The European Commission has been presenting the NGEU as ‘a once in a lifetime chance to emerge stronger from the pandemic, transform our economies’.
Following an unprecedented crisis due to the pandemic, Greece’s recovery and resilience plan responds to the urgent need of fostering a strong recovery and making Greece ready for the future. The reforms and investments in the plan will help Greece become more sustainable, resilient and better prepared for the challenges and opportunities of the green and digital transitions. To this end, the plan consists of 106 investment measures and 68 reforms. They will be supported by €17.77 billion in grants and €12.73 billion in loans. 37.5% of the plan will support climate objectives and 23.3% of the plan will foster the digital transition. The transformative impact of Greece’s plan is the result of a strong combination of reforms and investments, which address the specific challenges of Greece. The reforms address bottlenecks to lasting and sustainable growth, while investments accelerate the transition towards a low-carbon, digital and more inclusive economy.
In particular, the plan intends to facilitate the decarbonisation of the Greek economy, modernise and digitalise public administration including by improving the tax administration and justice systems, promote the innovation capacity, digital uptake and resilience of key economic sectors, and upgrade health care, education, and active labor market policies. All reforms and investments have to be implemented within a tight time frame, as the Regulation on the Recovery and Resilience Facility foresees they have to be completed by August 2026.
The milestones fulfilled demonstrate significant progress made in the implementation of Greece's recovery and resilience plan, and of its broad reform agenda. They include important measures such as the establishment of the framework for the Loan Facility and the launch of the on-lending via commercial banks and international financial institutions, which is expected to channel substantial liquidity to private investments over the next five years; the launch of major investments, such as a new round of the energy-efficiency enhancing renovations of residential buildings; and the entry into force of the new labor law, of a new legal framework for organisation of the electric vehicles market and of the new waste management law. When designing the plan, Greek authorities consulted national and regional social partners and stakeholders, while pursuing a close dialogue with the Commission ahead of the formal submission of the plan on 27 April 2021. On 17 June 2021, the Commission gave its green light to the plan. On this occasion, President von der Leyen symbolically transmitted the Commission’s assessment to Prime Minister Konstantinos Mitsotakis during a visit in Athens. The plan was in turn adopted by the Council on 13 July opening the door to its implementation and financing.
With their request, the Greek authorities provided detailed and comprehensive evidence demonstrating the fulfilment of the 15 milestones. The Commission thoroughly assessed this information before presenting its positive preliminary assessment of the payment request. The plan will foster economic growth and create jobs. These estimates do not include the possible positive impact of structural reforms, which can be substantial. The plan will lift Greece’s gross domestic product by 2.1% to 3.3% by 2026. This boost to the economy see the creation of 180,000 new jobs.
Greece will benefit significantly from the Recovery and Resilience Plans of other Member States, for instance through exports. These spill-over effects account for 0.3 percentage points of gross domestic product in 2026. This demonstrates the added value of joint and coordinated action at the European level. The Bank of Greece forecasts investments by the private sector to grow by 20% with gains being permanent in the long-term, driven by reforms and higher productivity. This plan will trigger a fundamental shift of the economic model towards a more extroverted, competitive, green and productive model, with a less bureaucratic, more efficient and digitalised state, with drastically reduced shadow economy, a growth-friendly tax system and a high-quality and effective social protection network accessible to all.
According to Minister of Finance Christos Staikouras, “Our strategy aims at a modern and dynamic economic policy mix, based on the implementation of prudent fiscal policy by reducing the tax burden of households and businesses and promoting structural reforms to address long-standing distortions of the Greek economy, broaden its productive base and strengthen the openness of enterprises. The overall 5 pillars of our reform agenda have been instrumental in achieving a strong recovery and sustainable growth, creating new jobs and strengthening social cohesion.”
Following a strong rebound in 2021, the post-pandemic recovery is set to continue in 2022 at a somewhat weaker pace, as it is affected by higher energy prices and the economic impact of the Russian military aggression against Ukraine, amidst lingering uncertainty related to the pandemic. The successful delivery of the bulk of the policy commitments and the effective reform implementation have improved the resilience of the Greek economy and strengthened its financial stability. According to the European Commission 2022 spring forecast, growth is expected to reach 3.5% in 2022 and 3.1% in 2023.
Despite prolonged uncertainty due to the successive waves of the pandemic, the Greek economy recovered quickly in 2021, offsetting almost entirely the sharp economic decline from 2020. Greece’s real GDP grew by 8.3% in 2021, reflecting the better-than-expected tourism season, while private consumption almost fully recovered. Growth was also driven by a notable boost in private investment, while goods exports continued growing, as the country benefited from the recovery in the EU and in other trading partners.
The turmoil on global energy markets is expected to increase domestic inflationary pressures and weigh on the real disposable income of households. However, government support measures, increases in the minimum wage, and the savings accumulated during the pandemic are expected to partially cushion the negative effects on private consumption. Heightened risk aversion, along with increased supply bottlenecks, may delay the kick-off of new investment projects, but the economy is also set to benefit from the deployment of RRP-financed projects. Export growth is forecast to remain solid on account of the recovery in tourism, which is estimated to remain resilient given the limited share of tourists from Russia, Ukraine and Belarus in total arrivals. Growth of goods exports is, however, expected to decrease compared to previous estimates in view of the projected slowdown in the EU and the global economy as a whole. Overall, real GDP is forecast to grow by 3.5% in 2022. Growth in 2023 is expected to remain high, at 3.1%, driven by the gradual recovery of real disposable income and a projected return of tourism to its pre-pandemic level.
Job creation showed strong growth in the second half of 2021 on the back of employment gains in agriculture and manufacturing. It is expected to continue also in 2022, despite the overall slow-down in economic activity this year. The minimum wage was increased by 7.5% as of May 2022, following a modest increase by 2% in January 2022. This is likely to support nominal wage growth in the second half of the year, given that almost a third of the total employees in the country receive a minimum wage.
Inflation is expected to peak in the second quarter of 2022 and remain high thereafter, before easing in 2023. Increasing international oil and gas prices are the main driver, while the surge in key input costs such as fertilisers and transport, is affecting food prices. Headline inflation is projected to reach 6.3% in 2022 and 1.9% in 2023. Russian’s military aggression against Ukraine has magnified the downside risks for the Greek economy, while the outlook remains contingent upon the forecast’s technical assumptions. Estimates for the spending outlook of households and the investment dynamic are highly sensitive to these assumptions. Uncertainty also concerns the tourist season, as real disposable incomes of domestic and foreign tourists may be reduced by inflation. On the upside, the strong performance in exports of goods over the previous period of heightened supply-side disruptions indicates some resilience of Greece’s exporting firms, which could result into a stronger export performance than currently expected.
Greece’s general government deficit reached 7.4% in 2021, which reflects mainly the pandemic-related emergency and support measures still in place. This outcome is better than expected earlier, and owes to the fast recovery of personal and corporate incomes. Public debt decreased to 193% of GDP due to the strong increase in nominal GDP. As growth continues, and some of the pandemic-related measures have already been phased out, the deficit is expected to decrease to 4.3% of GDP in 2022, although it is also set to be impacted by the temporary measures taken in response to the high energy prices.
The general government deficit is expected to decrease to 1% of GDP in 2023, bringing the primary balance to a surplus of 1.3% of GDP. This projected decrease assumes that most of the pandemic-related measures, as well as those implemented to cushion the impact of high energy prices, are phased out. The forecast factors in the prolongation of two growth-friendly tax-cuts planned by the authorities, which build on measures originally introduced in 2021 and 2022 to alleviate the impact of the pandemic, which were set to expire at the end of this year.
According to Deloitte, key indicators pointed toward a strong economic rebound in the Eurozone. Consumer confidence was positive, companies were willing to invest, and even the strains on supply chains had started to ease somewhat. Russia’s war in Ukraine has impacted the Eurozone’s economic outlook and substantially altered the region’s geopolitical landscape. And the longer the war drags on, the consequences will likely be greater and more acute. While the impact on the demand side—through the loss of Russia as an export market—may largely be negligible from a macroeconomic perspective, the supply side is expected to bear the real brunt through considerable increases in energy and commodity prices. Given the high levels of uncertainty, several scenarios for the Eurozone’s economic growth and inflation in 2022 are conceivable, ranging from a combination of slow growth and high inflation to moderate growth losses.
Two positive factors have stabilized the economy and to a degree cushioned the shock stemming from the war. First, unemployment, at slightly over 6%, remains very low by European standards. Second, European consumers still have high excess savings from the pandemic. A recent research by Deloitte estimates the amount of these additional savings at more than €800 billion. Services sectors, especially tourism and other personal services, are likely to benefit from pent-up demand and the additional savings. Business survey data from the European Commission shows that financial analysts largely hold positive expectations for the tourism and the food and beverage sectors.
Despite the geopolitical shock, the growth prospects for 2022 remain robust, underpinned by the strong second-round rebound of tourism which is expected to approach 2019 levels, the strong investment injection off the back of the RRF funds, the sizeable carry-over effect in 2022 from growth in 2021, estimated at 1.6%, and the narrowing distance to investment grade. Russia’s invasion of Ukraine and the sanctions imposed by European countries and the US on Russia could have significant and long-lasting implications for the global economy, as well as, for the Greek economy. Greece’s economy is expected to take a hit from the Russian invasion of Ukraine through two main channels, namely energy and tourism.
During the last two years, the Greek government provided an unprecedented fiscal stimulus in an effort to mitigate the recessionary impact of pandemic-related containment measures, taking advantage of the flexibility on fiscal rules in Europe and the historically low debt servicing cost of state borrowing. As a result, the primary deficit stood at the tune of 7% for these two consecutive years. According to the 2022 Budget, the primary deficit, in enhanced surveillance terms, reached -7.9% of GDP in 2020. It is expected to reach -7.3% of GDP in 2021 and shrink further to -1.4% of GDP in 2022. In 2020-2021, the Greek government adopted Covid-19 related fiscal policy interventions to address the negative consequences of the pandemic, amounting to EUR 40 bn. Most of these interventions took place in 2020 (EUR 23.1 bn), while, in 2021, several interventions recanted due to the gradual easing of containment measures and the recovery of economic activity (EUR 16.9 bn). According to the 2022 Budget, Covid-19 related policy interventions of EUR 3.3 bn are expected to be released for 2022. From 2023 onwards, primary balances are expected to return to surpluses; the achievement of fiscal discipline is expected to be the main catalyst for alleviating heightened fiscal risks. Primary surpluses, in tandem with the strong economic recovery and the favorable Greek debt profile, are expected to contribute to public debt sustainability in the medium term and the achievement of the investment grade through the upgrade of the Greek creditworthiness from the credit rating agencies within the following two years.
In January 2022, Fitch upgraded the outlook for the Greek sovereign to positive, reflecting their expectations of a strong rebound of economic activity and a narrowing fiscal deficit, supporting a faster-than-expected fall in public debt-to-GDP ratio amid rising - but still low - borrowing costs.