Fiscal risks mount as economy heads for recession

Authors: G. Hardouvelis, P. Monokroussos, C. Vorlow
Publication: Greece Macro Monitor, Eurobank Research, May 2009

Key points:

  • Domestic economic activity is expected to decelerate further this year, weighed down by tighter credit conditions and a significant deterioration in global growth dynamics. We now forecast real GDP growth to contract by 1.0% YoY in 2009, mainly as a result of lower investment spending and rapidly decelerating, though still marginally positive, consumer-spending growth
  • On a less negative note, certain country-specific cyclical and structural drivers may, to a certain extent, act as buffers to global contagion, allowing the Greek economy to maintain a significant growth differential relative to more developed euro area peers. Among other factors these may include: i. support to household disposable incomes from real wage gains and lower domestic inflation ii. less susceptibility to the international-trade channel relative to other, more industrialized countries iii. a more rigorous implementation of the New Investment Law e.g. via an acceleration of PPP projects and an increase in the absorption rates of EU structural funds and iv. a further significant deceleration in the growth of imports of goods and services this year, which should help mitigate the negative impact of lower exports growth on domestic GDP
  • National headline CPI is likely to retreat to sub-1% YoY levels in MayJuly, before edging higher thereafter, as oil price-related base influences come into effect. For the year as a whole, we forecast average inflation of just 1.1% YoY vs.4.4% YoY in 2008
  • The 3.7%-of-GDP (revised) official target for the general government budget deficit this year appears overly-optimistic and we now forecast a deficit outcome in excess of 6.0%-of-GDP. This mainly reflects our significantly-worse-than-officially-expected forecast for real GDP growth this year and concerns over the adequacy of a multitude special revenue-gen

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