Recovery Gathers Momentum
After shrinking by 25% during the crisis years, Greece’s economic recovery is well on track. Challenges remain, though, and reforms must continue.
The Greek economy is showing steady signs that it is rising from the ashes of the unprecedented economic crisis that brought the country to the edge of the abyss.
Macroeconomic prospects look considerably brighter for the first time in a decade. The Greek economy is in a third year of recovery after a prolonged, deep depression, while fiscal credibility has improved after years of painful austerity.
This new environment is helping to accelerate privatisations and unlock a plethora of opportunities for investors, spanning ports and marinas to the landmark Hellinikon urban development project at the site of the former Athens airport on the glorious southern Glyfada coastline.
Reflecting the country’s improving economic prospects is the advancing Greek stock market. The Athens bourse’s benchmark general index gained more than 49% over the course of 2019, marking its best year in the 21st century, while ranking it among the best-performing stock indices in Europe. According to new data from Deutsche Bank, the Athens Exchange delivered the highest total returns of any major asset class in 2019.
At the same time, the spread between the Greek 10-year bond and the German bund has dropped sharply to below 2%, which is lower than before the start of the country’s fiscal crisis in 2010. Meanwhile, the 10-year Greek bond is the eurozone’s top performer. The impressive performance even led the cost of borrowing for Greece in late 2019 to fall below that of Italy, while the interest rate on a 1-year T-bill issue was close to zero – all virtually unimaginable just a few years ago.
The Greek economy is coming out of the crisis in a different shape. Exports and global expansion dominate business strategies, which previously looked inwards towards domestic consumers. Businesses and individuals have become more flexible, innovative, and better at embracing uncertainty brought on by changing economic conditions at home and abroad.
New industries have been created; others are being reinvented.
Greece has deregulated sectors, allowing for new investments in areas such as pharmaceutical cannabis products, while tourism and shipping are adjusting because of global challenges. Greece’s food sector has also been rebranded with a distinctly national flavour, giving exports a significant push.
Data from the Panhellenic Exporters Association shows that exports hit €33 billion in 2018, 15.8% higher than 2017. In 2014, the figure stood at €23 billion.
Industrial and food products are key export drivers amid rising demand for Greek products in countries such as France and the United States.
Although the numbers point to better economic times for Greece, for many the real improvement in the economy has been the shift in mentality among Greeks. Start-ups dominate discussions, drawing more and more budding entrepreneurs into the fields of technology, health, tourism, and energy, among others.
“The Greek start-up ecosystem has made a huge jump during the last five to seven years, creating new jobs, poster-child companies, and value for the investors,” says Odysseas Ntotsikas, Managing Director at ThinkDigital Group.
“The most positive contribution of this early phase has been an overall mentality change that has made people believe in entrepreneurship as a force of good, for themselves and the economy as a whole,” he adds.
The change of government that took place following July 2019’s national elections is also helping boost sentiment. Many investors foresee conservative party New Democracy bringing more market-friendly policies to the table, a move that will give the economy an important lift.
The government has passed legislation introducing tax cuts as a means of spurring private consumption and investment activity, but cutting red tape and speeding up a convoluted legal system must remain top priorities on the reform plan.
Back on a Growth Path
Greece’s economy returned to growth in 2017 after a prolonged eight-year slump that saw gross domestic product (GDP) contract by a quarter during the crisis years.
And it continued to grow, albeit at a slower pace than hoped for, since the recovery began, bolstered by a strong performance by Greece’s booming tourism sector.
Labour market reforms are helping lift Greece’s competitiveness levels, while the recovering banking sector is also providing better support to the rebound.
Investors have also been encouraged by Greece’s fiscal reforms during the years of harsh austerity, which were imposed on the country in exchange for three international bailout loans.
Between 2009 and 2017, the primary fiscal balance improved by more than 14% of GDP, despite the recession, as the country underwent a gruelling austerity programme.
Greece’s primary budget surplus also continued to exceed medium-term targets, reaching 4.2% of GDP in 2018, according to the OECD, with a boost in VAT receipts from tourist spending and investment under-spending contributing to this performance.
According to the International Monetary Fund (IMF), Greece has “entered a period of economic growth that puts it among the top performers in the eurozone”.
However, the fund expects the Greek economy to grow by just 2.3% in 2020 (below government estimates), saying the recovery has been disappointing, while prospects are weighted down by stagnant investment, adverse demographics, and low productivity.
The European Commission (EC) also says Greece’s economic recovery is expected to continue, but it too warns of downside risks in the medium to short term, noting that fiscal risks could impact targets for growth and the primary budget surplus, which excludes interest payments on debt.
In its 2019 autumn economic forecast, the EC revised its growth forecast for Greece downward from 2.1% (in July) to 1.8% in 2019, while predicting a significant drop in unemployment to 17.3% – a level which had already been surpassed in June 2019.
According to the Commission’s forecast, the Greek economy is set to grow by 2.3% in 2020 but decelerate to 2% in 2021. Commission mid-term growth forecasts in July estimated GDP would grow 2.2% in 2020.
The same data indicates a further drop in unemployment levels to 15.4% in 2020 (from 17.3% in 2019) and to 14% in 2021. Meanwhile employment is projected to grow by 1.8% in 2020. Public debt is expected to drop by 12 percentage points from 175.2% in 2019 to 169.3% in 2020, and to 163.1% in 2021.
Looking ahead, a key issue will be how well Greece will be able to withstand the slowdown in the global economy.
In a change that rang alarm bells around the world, the IMF lowered its forecast for global economic growth to 3.2% in 2019 but sees it picking up to 3.5% in 2020. The impact of Brexit, along with trade tensions between the U.S. and China, are making investors and consumers nervous.
A drop off in global trade could translate into fewer tourists visiting Greece, a drop in orders for locally produced exports, and less demand for vessels owned or controlled by Greek shippers.
Perhaps the biggest obstacle still facing the country is its weak labour market. Unemployment has been continually falling, but new positions hitting the market are often lowly paid junior positions offering little or no job security.
The unemployment rate in Greece dropped to 16.9% in June 2019 from 19% in June 2018. This is the lowest since March 2011, and a far cry from its all- time high of 27.8% in March 2014. Still more encouraging, the latest drop is happening in tandem with an increase in the labour force participation rate, which is back up to 52.3% in June 2019 from a low of 51.6% at the start of 2018.
Yet although the unemployment rate has been on a downward path in recent years, it remains among the highest in the eurozone.
The first budget passed by the government of Prime Minister Kyriakos Mitsotakis in December 2019 foresees the economy expanding by 2.8% in 2020 on an annual basis, up from a projected 2% in 2019. And it also includes tax breaks of almost €1.2 billion, while the primary surplus calculated as per commitments associated with the country’s borrowing programme is seen at 3.56% of GDP.
The 2020 budget seeks to relieve pressure on the middle class, boost small businesses and the real estate sector, and put the focus on green growth.
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Reform holds The Key
Despite reforms already made, still-cumbersome regulation and a lack of finance have hindered private investment. There are also concerns that any backtracking on previously agreed upon reforms could weigh on the country’s economic growth prospects.
The European Commission warned that backtracking on reforms and a government package of pre-election relief measures, including a cut in the VAT rate and a bonus for pensioners, will incur a fiscal cost that will negatively impact projections on Greece’s primary budget surplus targets.
Former European Commission Vice President, Valdis Dombrovskis, lauded the fact that Greece was among the countries that have pushed through the most reforms over the last five years, which led to a rise in employment and an increase in consumer demand. But he also warned that Greece’s reform momentum had slowed in the first half of 2019.
The Bank of Greece also cautioned that “failing to meet the target for a primary surplus of 3.5% of GDP will lead to the imposition of new measures, such as cutting expenditure and reducing the Public Investments Programme.” This, it said, will have negative consequences on the growth rate of the economy.
Greece’s central bank forecasts GDP growth of 1.9% in 2019, against the government’s 2% growth forecast, and 2.1% in 2020 and 2.2% in 2021, mainly driven by private consumption, business investment, and exports.
After a weaker-than-expected start to 2019, Greece’s GDP expanded 2.3% in the third quarter following an upwardly revised 2.8% advance in the previous period.
Although there are hurdles ahead, Greeks are looking towards the future with optimism. Indicative of this is a survey published by Deloitte measuring sentiment among Chief Financial Officers (CFOs) in 20 countries in Europe. Deloitte found that 29% of Greek CFOs surveyed have an optimistic outlook about their financial prospects, making them the most upbeat group in Europe – a bout of optimism backed up by plenty of good reasons.