Greece Economic & Market Analysis - July 2013

External Rebalancing of the Greek Economy: A stronger export performance needs more investment, but creates a short-term funding gap.

In 2012, the current account deficit (CAD) in Greece registered an impressive improvement of about 6.5 pps while a nearly balanced position is within reach for 2013. The largest part of the reduction in import dependence – key driver of CAD adjustment -- will not reverse when a recovery takes hold, as it reflects a broad-based rebalancing of domestic demand.

The export contribution in economic rebalancing is gaining steam. The best performing merchandise export sectors are labor intensive -- as they have improved their cost competitiveness significantly – and have also been supported by the geographical diversification of exports to non-EU destinations.

The notable improvement in the economy’s savings-investment balance -- the counterpart of the CAD reduction -- mainly reflects the impressive fiscal adjustment (by 9.5 pps of GDP), a sizeable contraction in fixed investment, that nevertheless came at the cost of a large net disinvestment in the economy.

A significant increase in business investment is needed in the coming years to ensure a sustainable economic recovery and to support a healthy pace of capital reallocation towards more productive and export-oriented sectors. The higher-than-programmed investment will lead to a transitory deterioration of the current account deficit (from -0.5% of GDP in 2013 to -4.1% in 2015 compared with the programme’s estimate for a small surplus of 0.2% of GDP).

Τhe more rapid recovery in business investment envisioned under the optimistic scenario is expected to push the potential growth rate to above 3.3% in 2016 -- compared with 1.8% in the programme’s baseline scenario -- creating about 150,000 additional employment positions compared with the baseline scenario, that corresponds to an unemployment rate below 19% by end-2016 compared with 22.5% in the baseline scenario.

The financing of additional investment spending underlying this latter scenario is estimated to result in an increase in external financing needs by almost 10% of GDP for the period 2013-16 compared with the baseline scenario. To attract such private capital inflows, the programme must be implemented efficiently (both the fiscal as well as the structural reforms), so as to raise foreign investor confidence, while doubts over the country’s debt sustainability must be put to rest.

The analysis also includes:

Overview of economic and fiscal developments in Greece and key macroeconomic forecasts for 2013-14.