We expect that the Greek economy will expand by 6.0% in 2021, and there may be some upside to that forecast as annual GDP growth in real terms was 7.2% in the first half of the year.
In 2022 the recovery will continue as the deployment of Next Generation EU recovery funds gathers pace and lifts real spending. NGEU grants allocated to Greece amount to 18.4 billion euros (10.1% of 2019 nominal GDP, making it one of the major beneficiaries). We assume that just under 45% will be spent in 2021-23.
We forecast the government deficit to be 10.0% of GDP in 2021, before declining in 2022 as pandemic support measures are unwound and the economic recovery supports revenues. This is consistent with the government debt to GDP ratio having peaked in 2020, and reaching 204.7% this year, and 201.9% in 2022.
Our forecasts are consistent with an incomplete recovery in the tourism sector compared with pre-pandemic levels. Indeed, we expect the current account deficit to remain elevated over the next two years also due to domestic demand boosting imports.
The NGEU funds will provide a substantial boost to overall demand in the Greek economy, especially government spending and investment. An upside to our projections is the fact that we do not yet include the impact of NGEU loans in our growth projections. The loans component of the National Recovery and Resilience Plan has €12.7 billion available (around 7% of 2019 GDP). We will include the impact of these as more information on the relevant projects and financing becomes available over time.
The Greek economy had displayed positive growth dynamics in the three years before the pandemic, and has shown resilience following the sharp decline in activity in the second quarter of last year. However, the overall level of GDP is still some way off the level before the sovereign debt crisis. In particular, investment as a share of GDP remains well below the pre-2008 average; NGEU funds should address this shortfall at least in part.
The evolution of the pandemic, with the possibility of renewed health restrictions, is one risk to the economic outlook in the coming months. Another, maybe more substantial risk is the emergence of supply constraints affecting a range of industries, with an impact on firms’ costs, output and overall demand. A slower-than-assumed deployment of NGEU funds would also result in lower GDP estimates and forecasts.
Greater confidence in government debt/GDP returning to a firm downward path and continued improvement in banking sector asset quality could lead to positive rating action.