Greece Macro Outlook - January 2019

Domestic demand gains traction, offsetting the risks from deteriorating global conditions


Economic activity was on an upward trend in 2018 (GDP grew by a healthy 2.1% y-o-y in 9M:2018), on the back of supportive domestic demand conditions and resilient export growth.

Forward-looking and coincident indicators of economic activity for Q4:2018 suggest that the annual GDP growth target of 2.0% for FY:2018 is likely to be exceeded.

Such development would correspond to a "positive carry" of over 0.4% to GDP growth in 2019, which – coupled with accelerated wage growth and the implementation of fiscal expansion measures of 0.5% of GDP in 2019 – is estimated to support average GDP growth in 2019 slightly higher than in 2018, offsetting negative impacts from the deterioration in the global environment and other exogenous or idiosyncratic sources of risk.

Private consumption is expected to accelerate to 1.6% y-o-y in 2019 from an estimated 0.9% y-o-y in 2018, reflecting higher households' disposable income (projected at 1.9% y-o-y in 2019, in constant prices terms), on the back of healthy employment growth and a pick-up in hourly wages.

Greek firms remained conservative in their decisions for new investment in 2018 – despite a continuing improvement in value added generation and business profitability – and most of them continued to prioritize a further compression in their costs, using mainly internally generated funding to finance new capital spending.

Accordingly, a prospective increase in investment in 2019 (by 10.9% y-o-y from an estimated  -4.0% y-o-y in 2018) will remain highly dependent on the pace of improvement in domestic demand conditions and, thus, on the sectoral developments in capacity utilization, in conjunction with public investment activity, which remained lower-than-initially-envisaged in 2018.

Greece's commitment to fiscal soundness has been re-affirmed in 2018, with the primary surplus in General Government in FY:2018 estimated at 3.98% of GDP.

A set of expansionary fiscal measures amounting to 0.5% of GDP will take effect in 2019, corresponding to the first loosening in fiscal policy since 2009. This expansion will be financed by the recurring part of the fiscal overperformance in the period 2016-2018 (0.5% of GDP, on average) and is expected to provide an analogous impulse to domestic demand.

Greece's public debt terms are already favourable prior to the implementation of a new set of medium-term debt relief measures: weighted average maturity of 18½ years; effective interest of c. 2.0%; 85% of debt at fixed rate; and 79% of debt held by the official sector.

Greek financial assets continue to underperform in a higher-volatility global environment and do not properly reflect the significant progress in macroeconomic adjustment.

Even in this challenging environment, the economy is gradually reappearing on the market radar, especially in sectors with competitive advantages and attractive valuations. The cumulative increase in inward FDI reached €8.6bn between 2016 and 10M:2018.

Greece Macro Outlook - January 2019