Greece's economic recovery picks up supported by exporting activity - September 2017

Greece's economic recovery picks up, supported by exporting activity

The stage is set for a strong rebound in economic activity during H2:2017, following the completion of the 2nd review of the programme and increasing support to GDP growth from tourism and other exporting sectors. Greek GDP growth accelerated to +0.8% y-o-y in Q2:2017 from +0.4% y-o-y in Q1:2017, with solid growth in net exports of goods and services, contributing +1.8 pps to annual GDP growth in this quarter -- the highest contribution in 2 years -- more than compensating for the decline in gross fixed capital formation, due to weak public investment and negative base effects in this period.

Private consumption growth slowed to +0.7% y-o-y in Q2:2017 from 1.2% y-o-y in Q1:2017, affected, inter alia, by elevated fiscal pressures, persistent liquidity tensions and a drag on disposable income from the pick-up, albeit still modest, in inflation during H1:2017.

Employment growth picked up in Q2:2017, reaching 2.3% y-o-y, up from 1.4% y-o-y in Q1:2017 and 0.5% y-o-y in Q4:2016 and the unemployment rate declined to a 5-year low of 21.2% in June 2017 from 23.4% in December 2016, 6.7 pps below its peak of 27.9% in September 2013. Qualitative aspects of job creation, such as the activity rate, average working hours and hourly compensation, are also showing signs of improvement. Survey data for employment prospects point to a further strengthening in labor market conditions in Q3:2017.

The fiscal performance in 8M:2017 is in line with the upwardly revised targets of the Medium Term Fiscal Strategy (MTFS 2018-2021). A credible overperformance on the expenditure side offset weaker revenue in August. This slippage in revenue is mainly attributed to temporary factors (see below, p. 9), which negatively affected personal income and property tax revenue during this period.

Forward-looking indicators presage a further improvement in activity in Q3:2017, when the direct and indirect support from tourism comes to the fore, boosting business spending and employment and supporting the fiscal adjustment. In this respect, tourism revenue rebounded strongly in Q2:2017 (+10.1% y-o-y) and is expected to maintain this momentum in Q3:2017.

During the 2nd semester of 2017, the back-loading of the public investment programme, along with the planned clearance of government arrears, which jointly amount to 9.1% of H2:2017 GDP (0.6% of GDP higher than in H2:2016), should provide an additional boost to GDP growth.

The above trends bode well for an acceleration in GDP growth to above 2% y-o-y in H2:2017, leading average annual growth for FY:2017 close to 1.6%, up from 0% in 2016, and entering 2018 with activity in high gear.

Nonetheless, the extremely vulnerable position of a significant number of households and businesses is unlikely to be cured quickly, suggesting that these entities will continue to struggle to service their fiscal obligations and bank debt.

A timely completion of the 3rd review of the programme -- which is necessary for maintaining   favorable macroeconomic momentum -- in conjunction with a prospective specification of the medium-term measures for public debt, so as to sustainably reduce debt servicing costs, would boost economic sentiment and contribute to an improvement in financial conditions, and thus to stronger activity and employment creation in 2018.



Greece's economic recovery picks up supported by exporting activity - September 2017