Economic activity is expected to grow by 2.4% in 2023, before gradually moderating to 2.2% by 2025. The expansion is supported by the implementation of the Recovery and Resilience Plan (RRP) and a resilient labour market. Headline inflation is projected at 4.3% in 2023 and set to moderate to around 2.1% in 2025, albeit gradually as tightening labour market conditions add to upward pressure on prices. The general government deficit is set to shrink further on the back of muted expenditure growth and higher revenues. Together with solid nominal GDP growth, this is set to support the decline of the high public debt-to-GDP ratio.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | 2,4 | 2,3 | 2,2 |
| Inflation (%, yoy) | 4,3 | 2,8 | 2,1 |
| Unemployment (%) | 11,4 | 10,7 | 9,9 |
| General government balance (% of GDP) | -2,3 | -0,9 | -0,8 |
| Gross public debt (% of GDP) | 160,9 | 151,9 | 147,9 |
| Current account balance (% of GDP) | -7,0 | -6,1 | -5,6 |
Growth set to moderate after post-COVID recovery
The Greek economy posted solid growth in the first half of 2023, driven primarily by consumption and net exports. Private consumption benefited from pent-up demand, notably in services, while a significant drop in imports prompted a positive contribution of net exports that had been underperforming in recent quarters. Investment activity slowed significantly following a spike in the last quarter of 2022. The impact of the devastating Thessaly floods on overall growth is expected to be limited due to the region’s relatively low share in total value added. On the back of increasing domestic demand with the full recovery of tourism, real GDP growth for the remainder of the year is expected to be solid, averaging 2.4% for 2023 as a whole.
With the post-pandemic recovery waning, economic activity is set to decelerate. Still, GDP growth is expected to remain above the long-term growth potential over the forecast horizon, supported by the implementation of the RRP and the gradually improving external environment. Going forward, private consumption growth is set to slow down as pent-up demand phases out, but still to remain solid amid expected wage growth. The implementation of the RRP is shifting from reforms towards investments and is thus set to sustain capital spending, while the loan facility is expected to help sustain corporate credit growth and thus corporate investment by partly mitigating the impact of current tighter financing conditions. Gains in cost competitiveness accumulated over the past decade are likely to benefit export growth once external demand picks up again over the forecast horizon. However, due to the high import content of investment, rising imports are set to slow the adjustment of the external balances. Overall, economic growth is projected at 2.3% and 2.2% in 2024 and 2025, respectively.
A resilient labour market and increasing wage pressures
Employment growth is set to continue, albeit at a slower pace. The unemployment rate is forecast to fall to 9.6% by 2025, its lowest level in over a decade. The labour market has started to show first signs of labour shortages in key sectors (construction, services). With rising nominal wages and the slowdown in inflation, real compensation of employees is expected to turn positive in 2023 following a contraction in 2022.
Inflation to decelerate but pressures remain
Headline inflation is expected to average 4.3% in 2023 and to remain above 2% over the forecast horizon. Recent monthly readings point towards an uptick in energy and services inflation (on a seasonally adjusted month-on-month basis), while the food prices are being impacted by the recent floods in the region of Thessaly, a key area for agricultural production. In the longer term, the expected stronger wage growth associated with a tight labour market is set to add upward pressure on prices. Consumer prices are forecast to increase by 2.8% and 2.1% in 2024 and 2025 respectively.
Fiscal balance set to improve
The general government deficit is forecast to remain broadly unchanged in 2023, reaching 2.3% of GDP. Underlying this headline balance is an improvement in the primary balance, which is expected to record a surplus of 1.1% of GDP this year, up from 0.1% in 2022. This improvement is primarily due to the phasing out of the measures to mitigate the (economic and social) impact of high energy prices and better-than-expected tax revenues, particularly from value added tax, and social security contributions. These driving factors were only partially offset by the increased expenditure related to the adverse impact of recent natural disasters. The improvement in the primary balance is broadly offset by higher interest expenditure.
In 2024, the general government deficit is forecast to decrease to 0.9% of GDP. This can be mainly attributed to the phasing out of expenditure measures, such as the extraordinary bonus for pensioners and the social transfer labelled ‘market pass’ which are not expected to be prolonged beyond 2023. Also, the expenditure related to natural disasters during the summer of 2023 is expected to decrease in 2024. This forecast factors in the reform of the public wage grid, the increase of the personal income tax allowance for families with children, and the permanent increase of the overnight tax.
The general government deficit is expected to decrease further to 0.8% of GDP in 2025. despite the gradual reduction of the self-employed fixed tax which is expected to start in 2025, and the planned reduction of social security contributions by 0.5 pps.. The fiscal cost of these measures is projected to be limited to 0.1% of GDP in 2025. Public spending growth is expected to remain overall muted thereby improving the balance.
The public debt-to-GDP ratio is set to decline throughout the forecast horizon, largely driven by the increase in nominal GDP, but also helped by primary surpluses. The ratio is expected to decline to 160.9% in 2023, 151.9% in 2024, and to 147.9% in 2025.
The fiscal outlook is subject to country-specific risks. Downside risks stem from pending legal cases, most notably the litigation cases against the Public Properties Company (ETAD). On the upside, the government’s efforts to increase tax compliance through digitalisation may yield already in 2024 additional revenues compared to the current forecast.