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Greek economy seen slowing due to Ukraine war, inflation

Bank of Greece has revised lower its growth outlook on the country for 2022 due to high inflation and the Ukraine war seen weighing on consumption and investments.

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In an annual report for 2021 from governor Yiannis Stournaras, it says that the main objectives of economic policy in 2022 should be to maintain the growth momentum, with a view to expanding the productive capacity of the economy, and to continue efforts to regain investment grade; the latter should become a national goal.

“After a period of sluggish growth pre-pandemic, the Greek economy needs to follow a growth path towards convergence with the euro area, changing its productive model and focusing on investment and extroversion. The current, big international geopolitical challenges should be seen as an opportunity to accelerate the planned reforms rather than as a problem,” it said.

“Examples include the creation of a large green energy hub in Greece and the digital transformation of the state. A smoothening out of Greek-Turkish relations and its economic impact would also be a significant opportunity,” it added.

The Greek economy is tipped to expand by 3.8 percent this year, versus a previous forecast of 4.8 percent. In an adverse case scenario, GDP is seen moving ahead by 2.8%, depending on the extent and duration of the shocks in international energy and food prices, as well as the deterioration in confidence and financial market turmoil.

Although the main drivers of growth this year are domestic demand and tourism, there is significant uncertainty: the negative impact of inflation on households’ real disposable income will drag down private consumption expenditure. Higher production costs and lower consumption will weigh on firms’ profitability and, together with widespread uncertainty, could lead to a postponement or cancellation of investment decisions. There is also uncertainty about tourism inflows, mainly from Europe and the United States, due to a decline in the purchasing power of households in the countries of origin, but also to a feeling of insecurity.

On the other hand, there are several countervailing forces at play, which mitigate the negative effects. These include: the lifting of the various pandemic-related restrictions, both domestic and international; the start of investment projects under the National Recovery and Resilience Plan; rising employment; accumulated savings; and continued growth in exports.

In 2021, headline HICP inflation in Greece was 0.6%, mainly driven by rising energy and food prices. It was well below the euro area average. Under the baseline scenario, inflation is expected to accelerate to 5.2% in 2022, while a further increase to 7% is projected under the adverse scenario. A de-escalation of inflation is expected in 2023, provided that supply chains are fully restored and energy prices fall.

Restoring fiscal sustainability is crucial for a further upgrade of the country’s credit rating. The robust performance of tax revenues combined with the gradual withdrawal of the temporary pandemic-related support measures allow a drastic reduction in the primary deficit during 2022, despite the problems caused to the Greek economy by the war in Ukraine.

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