In its Spring 2016 forecast for the EU economy, the European Commission wrote: The Greek economy demonstrated a remarkable resilience in 2015, reflecting inelastic private consumption and a positive contribution of net exports. Growth is expected to resume in the second half of 2016 and to pick up in 2017 thanks to the return of confidence and the impact of structural reforms. Following stronger than expected public finances in 2015 and the additional fiscal package currently finalised by the Authorities, the general government balance is expected to improve further.
Economy more resilient than expected in 2015: Real GDP in 2015 turned out to be slightly negative, at -0.2% that is over 1 pp. better than expected after the imposition of capital controls in July 2015. Economic activity was backed by the surprising resilience of private consumption, positive net exports and by an acceleration of public investment at the end of the year.
Growth to return in the second half of 2016: Greece’s real GDP is forecast to contract by 0.3% in 2016, slightly less than expected in the winter forecast, as the adverse trends in the second half of 2015 turned out more moderate than projected. Domestic demand is projected to mainly drive the contraction. While fiscal consolidation should continue to weigh on household disposable income, the fall in public and private consumption is expected to be partly offset by a positive contribution of net exports backed by another good year for tourism and positive trends in the export of goods. Investment is projected to slightly decrease as a result of inert credit conditions. Subsiding uncertainties following the conclusion of the first review of the ESM programme should support the gradual relaxation of capital controls and fuel investment. The economy is expected to start growing again in the second half of 2016 and should gather strength in 2017 as domestic demand accelerates with the help of EU structural funds, and of liquidity injected via the clearance of government arrears.
Greece’s current account deficit has been improving since 2011 and it is expected to turn positive in 2016, as past and ongoing structural reforms improve external competitiveness. Unemployment fell in 2015 and is projected to continue declining over the forecast horizon, amid marked declines in wage growth and significant reforms over recent years, the gradual recovery of the economy, and employment schemes promoting labour participation. HICP deflation continued in 2015 and prices are projected to fall further in 2016 – albeit at a moderate pace – as the impact of lower oil prices and weak demand are expected to outweigh the inflationary impact of a VAT hike. HICP inflation is projected to turn positive in 2017.
Uncertainties around the forecast remain large. The projected recovery is contingent on the timely conclusion of the first review of the ESM programme, as well as positive financial market and trade developments. Upside risks could come from a faster-than-expected pick-up in business and consumer confidence. The downside risks are related to a failure to fully deliver on the reform programme, a higher-than-expected negative impact of the refugee crisis on trade and tourism, as well as the slowdown in global trade.
Robust consolidation package to ensure public finances reach medium-term targets: The resilience of the economy, the fiscal consolidation in the second half of 2015 and certain large positive one-off factors helped Greece achieve -according to the programme definition- a primary surplus of 0.7% of GDP in 2015, overachieving the primary balance target of -0.25% of GDP.The recapitalisation of the banking sector completed in late 2015 deteriorated temporarily the fiscal balance by 4.2 pps., pushing the headline deficit to 7.2% of GDP in 2015.
Notwithstanding the over-performance in 2015, additional savings are envisaged by the government, amounting cumulatively to 3% of GDP through 2018, in order to reach the programme’s primary surplus targets of 0.5% of GDP in 2016, 1.75% of GDP in 2017 and 3.5% of GDP in 2018.
The adjustment package includes 1% of GDP from a comprehensive reform of the pension system, 1% of GDP from personal income tax reform, 1⁄4% of GDP from changes in the VAT standard rate, 3⁄4% of GDP from adjustments to the public sector wage bill, and in motor vehicle taxation and consumption taxes, primarily on energy products, alcoholic beverages, and tobacco. Based upon the primary balance targets, the headline deficit is projected to fall to 3.1% of GDP in 2016 and 1.8% of GDP in 2017.
The debt-to-GDP ratio is expected to increase from 176.9% in 2015 to 182.8% in 2016 due to the clearance of arrears, which was postponed from 2015 to 2016 and to programme disbursements taking place in 2016 instead of 2015 given past delays in completing reviews. The debt-to-GDP ratio is expected to start declining in 2017.
Downside risks to the fiscal forecast include spending from the refugee crisis, as well as possible delays in the implementation of the reforms with a budgetary impact. Upside risks stem mainly from revenue administration reforms and revenue buoyancy in light of the strong revenue collection witnessed in the second half of 2015.