Special Focus Report: Buoyant labor market, revived tourism, and new fiscal measures cushion the inflation impact

Highlighting the factors that counteract the impact on private sector’s disposable income from increasing inflation

CPI inflation accelerated further to 10.2% y-o-y in April 2022, the highest pace on record since 1995, raising concerns of a larger-than-initially expected impact on the private sector’s disposable income.

Further increases in energy and food prices and a strengthened transmission of rising input costs to other categories of goods and services are expected to push inflation to new highs of c. 12% in May-June 2022.

CPI inflation is projected to peak in Q2:2022, slowing modestly in Q3, and decelerating at a faster pace from Q4:2022 onwards, when supportive base effects on energy prices will kick in. The average inflation for FY:2022 is estimated at 8.5%.

Encouraging trends in the Greek labor market, both in terms of employment creation as well as regarding wage developments, will help offset the rising toll on household disposable income.

Labor Force Survey data for Q1:2022 revealed a stronger-than-expected momentum in employment creation, which is expected to gain additional traction in Q2:2022, leading to an annual employment growth in FY:2022 of 4.5%. Strong tourism activity will boost the hiring momentum in Q2 and Q3 giving rise to further upside risks.

Higher minimum wage (+9.7% y-o-y), strengthened labor productivity, and strong labor demand bode well for a broader adjustment in private sector wages in Greece, following a long period of restraint.

NBG estimates that the average wage in the private sector will increase by 2.5% and 1.5%, respectively, in 2022 and 2023, through the transmission of the minimum wage adjustment and supportive market conditions. 

Household mixed income – mostly reflecting proceeds from unincorporated business activity and rents – will increase by an average pace of 10% y-o-y in 2022 and 4.5% in 2023, typically showing a close correlation with inflation.

Additional fiscal support to the private sector of about €5.5 bn (2.8% of GDP) has been activated to limit the impact of higher energy costs, especially to low-income households and SMEs.

All in all, the estimated combined support to households in 2022 from the labor market adjustment and new fiscal measures is estimated at 8.5%-9.0% of their 2021 disposable income, broadly matching CPI inflation.

The combined increase in business production costs in 2022, due to the deterioration in the terms of trade and higher wages, is estimated in the vicinity of €8.5 bn  (4.3% of GDP or around ¼ of the gross operating surplus of the Greek corporate sector in 2021) and remains manageable in view of:

  • The resilience of demand reflected in the buoyancy of business turnover data 
  • The strong start to the tourism season and increasingly encouraging signs for the coming months, with an upside potential of €7 bn to reach 2019 outcomes
  • The strong recovery in business profitability in 2021 to a 10-year high, combined with strong liquidity buffers
  • Increased pricing power and additional fiscal support to firms
 

Special Focus Report: Buoyant labor market, revived tourism, and new fiscal measures cushion the inflation impact
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