Increasing cashless transactions shrink the shadow economy and support activity
The Greek economy is proving unexpectedly resilient, overperforming compared with the gloomy forecasts that followed the imposition of capital controls. Employment creation has been ongoing, and VAT revenue trends have improved notably in recent months, exceeding by a significant margin the impact from the increase in the effective VAT rate in July.
The resilience of activity, especially private consumption, does not appear to be related to either increases in precautionary consumption or domestic production. Indeed, NBG analysis suggests that the resilience of consumption is related to the surge in cashless payments (+90% y-o-y in H2:2015). The increase in this form of payment appears to have prompted a shift in activity from the shadow to the official economy, which mostly benefited larger enterprises, to the detriment of SMEs.
An imminent policy challenge is to maintain the favorable momentum in bringing down unreported activity and, at the same time, push forward with the timely lifting of capital controls to reverse the associated costs. In fact, the latter have started to manifest themselves, mainly through the sharp decline in private capital inflows to the economy.
NBG Research estimates that an annual increase of 10% in cashless transactions adds about 0.2% to GDP growth. Indeed, it is estimated to have added almost 1.4 pps to real GDP growth (y-o-y) in H2:2015 and an estimated 0.8% in FY:2015 GDP, resulting in GDP growth of about -0.3% in FY:2015 versus an initially-estimated -2.3% by the official sector.
In 2016, GDP growth is estimated at -0.2% y-o-y. The economy will benefit from a further increase in cashless payments which are expected to add +0.7% to FY:2016 GDP growth, as well as from lower energy prices (+0.6% to FY:2016 GDP growth). Over the longer run, NBG Research estimates that a continued increase in cashless payments close to the average of Southern euro area countries (c. 12% of GDP) would add about 0.5% to average annual GDP growth in the period 2016-2020, and €1.5bn of additional government revenue (0.8% of 2015 GDP).
In view of the significance of cashless payments for supporting activity and tax revenue, the provision of incentives for increasing further the penetration of electronic payments in the Greek market is essential.
Τhe analysis also includes:
Overview of economic developments in Greece and key macroeconomic forecasts.