Economic Analysis, Greece

Effects of world economic slowdown increasingly evident

Authors: Gikas Hardouvelis, Platon Monokroussos, Constantine Papadopoulos, Tasos Anastasatos, Costas Vorlow, Theodosis Sampaniotis
Publication: Greece Macro Monitor, Eurobank Research, July 2008

Key points:

  • Domestic economic activity is expected to decelerate in both 2008 and 2009, weighed down by tighter credit conditions and the dampening effects of higher oil and food prices on household disposable incomes. At the same time, tourism, shipping and exports continue to act as shock absorbers, significantly cushioning these effects. All told, we expect economic growth to come in at 3.3% this year, before decelerating further to around 3.0% in 2009.
  • We expect domestic inflation to remain elevated for the remainder of 2008, fuelled by higher input costs, new administrative increases in the special consumption tax on fuels and accelerated wage growth. Though favorable base effects should facilitate some moderation in year-on-year inflation in the last quarter of the year, we expect annual CPI to come in at 4.5%, against our earlier forecast of 4.2%.
  • Despite an expected improvement in budget revenue growth in H2, we see upside risks to our revised 2.5%-of-GDP budget-deficit forecast for this year, especially if efforts to crack down on tax evasion and reduce discretionary spending fail to yield the expected results.
  • Our estimations suggest that, excluding the impact of oil prices and ship purchases, the current deficit has to decline by 5.4 percentage points of GDP (from the current level of approximately 14% of GDP) in order to become sustainable in the medium-term. This implies a required real depreciation of 25%, based on very lenient assumptions.
  • OTE and Deutsche Telekom reached a path-breaking agreement, with OTE ceding day-to-day management control.

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