Special Focus Report: Limited impact on Q4:2023 GDP from the catastrophic flood and higher growth in 2024-25 due to reconstruction projects

The near-term drag on GDP growth from lower agricultural production and higher inflation  will turn into a net boost for medium term growth on the back of  increased fixed capital investment 

The extreme rainfall from the storm “Daniel” – classified as a 1-in-200+ years weather event for Greece – led to a catastrophic flooding in Thessaly (Central Greece) in early-September. The extent of the damage raises legitimate concerns about its impact on regional and country-wide economic activity, given that the region plays an important role in primary production and manufacturing.

In particular, Thessaly accounts for 5% of Greece’s gross domestic product, 6.7% of total employment, 14% of farmland and 7% of gross value added (GVA) generated in the manufacturing sector, with even higher contributions in arable crop production, as well as in the production of vegetables, meat and dairy products.

According to estimates by experts and specialized bodies, the flooded area corresponds to c. 18% of the total cultivated area of Thessaly.

The near-term drag on activity will come from the destruction of agricultural output and other supply-side frictions, which are also affecting manufacturing production and services activities.

NBG estimates conservatively assume complete loss of 25% of Thessaly’s primary sector output for the remainder of the year and the first months of 2024, a 15% drop in manufacturing GVA and an 80% fall in tourism revenue in the region until early 2024. This impact will be largely cushioned by government measures with immediate effect.

Increased inflation at an economy-wide level combined with flood-related production losses leading to a slowing in GDP growth to 1.6% y-o-y in Q4:2023, following robust GDP growth in Q2 of 2.7% y-o-y and estimate of 3.4% in Q3, underpinned by buoyant tourism, resilient private consumption, and solid fixed capital investment spending.

The above trends suggest FY:2023 growth of at least 2.4% y-o-y and slightly higher than the latest official forecasts for Greece, once the production drag from the flood and higher inflation are included into Q4 growth estimates.

A net boost to GDP growth of 0.3 pp, on average, is expected in 2024-25 from higher public and private investment in restoration, water management and anti-flood projects, as well as spending for the replacement of capital equipment and consumer durables, leading GDP growth to 2.7% and 2.3% respectively in 2024 and 2025.

The major part of the reconstruction will be financed by the public sector, with the support of EU funding, which is expected to exceed €2.5 bn, as well as by insurance recoveries and private sector donations.

Special Focus Report: Limited impact on Q4:2023 GDP from the catastrophic flood and higher growth in 2024-25 due to reconstruction projects