Greece Macro Outlook – June 2020

COVID-19 interrupts Greece's recovery and will test the resilience of the economy


Greek GDP declined by -0.9% y-o-y in Q1:2020 (-1.6% s.a. q-o-q) – in a quarter that begins to include the impact from Covid-19 – compared with an average of 2.0% y-o-y during the past 6 quarters.

The decline was led by gross fixed capital formation and private consumption (-6.4% y-o-y and -0.7% y-o-y, respectively, jointly subtracting 1.2 pps from GDP growth in Q1:2020). The decline in private consumption mainly reflects the role of uncertainty that bolstered precautionary saving.

An increase in government consumption (2.0% y-o-y) – mainly comprised of COVID-19 related spending – absorbed a part of the hit, contributing 0.4 pps to GDP growth in Q1:2020.

On a positive note, net exports contributed 0.8 pps to annual GDP growth in Q1:2020, on the back of a 4.7% y-o-y increase in goods exports; a good performance in view of the fact that most of Greece's trading partners entered recession during this period. Greek enterprises took advantage of disruption in global supply chains and shortages created by export restrictions to increase their export in specific categories.

Income-side data suggest that economy-wide labor compensation continued to increase by 1.9% y-o-y in Q1:2020, while business profitability started to decline, with gross operating surplus and mixed income dropping by 3.1% y-o-y.

Greek tourism and related activities, which held up relatively well during the Greek crisis, are expected to suffer the most, leading to a double-digit contraction in activity in Q2:2020 with a pick-up expected in H2:2020 (q-o-q basis).

However, the implementation of fiscal stimulus measures of a combined value of €15bn in conjunction with funding related to EU initiatives, are going to support economic activity in H2:2020.

Overall, the baseline scenario envisages a GDP contraction of 7.5% in FY:2020. The shape of recovery in H2:2020 and in 2021 depends on the pace of normalization in domestic spending, the responsiveness of the business sector and the success of economic policy.

A timely activation of the EU "Recovery Plan" (envisaging a financial support of c. €32 bn for Greece) could provide additional impetus to the recovery in 2021, bolstering investment spending and limiting downside risks related to a more-protracted-than-currently-envisaged impact of the pandemic on private spending and especially on tourism. Its announcement has already a positive impact on confidence.

Greece Macro Outlook – June 2020