Greece Macro Outlook - July 2019

Increasing confidence and declining country risk support demand and Greek asset valuations


Greece's recovery continues, with GDP rising by 1.3% y-o-y in Q1:2019 (0.2% s.a. q-o-q), for an 8th consecutive quarter, albeit continuing to decelerate from 1.5% y-o-y in Q4:2018 and 2.1% y-o-y in Q3:2018 on the back of annual increases in gross fixed capital formation and private consumption of 7.9% and 0.8% y-o-y, respectively.

Employment expanded at a broadly stable pace (2.2% y-o-y in Q1:2019 from 2.0% y-o-y in FY:2018), with the unemployment rate declining to a 7½-year low of 18.1% in March 2019, while average hourly compensation increased by 1.8% y-o-y in Q1:2019 (4.4% y-o-y in FY:2018).

Consumer spending continued to respond positively to the supportive labor market conditions and increased consumer confidence and is estimated to strengthen further during 2019 (an expected increase in private consumption of 1.5% y-o-y in FY:2019).

Despite the positive performance in Q1:2019, gross fixed capital formation remains less buoyant than would be otherwise expected at this point of the economic cycle, since the improving performance and investments of larger, more competitive, corporates continued to be counteracted by an ongoing divestment from a large mass of weaker firms, while the economic slowdown internationally weighs on investment decisions of exporting firms.

Total exports grew at their weakest pace in 2½ years in Q1:2019, since a healthy expansion in exports of services of 8.7% y-o-y (driven by tourism and shipping) in this period was counteracted by a contraction in exports of goods by 0.7% y-o-y – the first since Q4:2016 – in the face of slowing demand in major exporting markets (mostly in the euro area).

Tourism activity is not expected to provide material support to GDP growth in FY:2019, with tourism revenue stabilizing at the 2018 levels, on an annual basis, despite the strong start to the year (23.3% y-o-y in 4M:2019).

GDP growth is estimated to reach 1.8% y-o-y in FY:2019, with upside risks to this scenario relating to a further improvement in business and consumer sentiment in the coming months, compounded by an additional sustainable compression in country risk and a significant increase in tourism revenue (> 2.0% y-o-y).

House prices increased by 4.0% y-o-y (1.7% q-o-q) in Q1:2019 – the strongest annual pace in 11½ years – from 2.6% y-o-y in Q4:2018 and 1.6% y-o-y in FY:2018, while prime commercial real estate valuations (average of retail and office prices) increased by a solid 5.9% y-o-y, on average, in H2:2018 (5.7% y-o-y, on average, in FY:2018).

Greece's commitment to fiscal soundness has been re-affirmed in 2018, with the primary surplus in General Government increasing to a historical high of 4.3% of GDP in 2018 (from 4.1% in 2017), surpassing for a 3rd consecutive year the Enhanced Surveillance Framework's maximum target for a surplus of 3.5% of GDP.

Expansionary fiscal measures amounting to at least 1.0% of GDP are taking effect in 2019 corresponding to the first loosening in fiscal policy since 2009 and are expected to provide a broadly analogous impulse to domestic demand. The risk to the 2019 Budget is unclear, but the Bank of Greece and the EC have raised warning flags. This will be a priority of the new Government.

A new pro-market Government with a stable parliamentary majority supports confidence, but will be judged by how fast it moves to increase the attractiveness of the business environment, improve fiscal fairness and promote social cohesion.

Greek Government bond yields declined to historical lows in June 2019, buoyed by declining country risk and supportive monetary conditions in the euro area.

In the same vein, Greece's financial assets rallied in H1:2019, capitalizing on improving investor sentiment and attractive valuations.

Greece Macro Outlook - July 2019