Although the Greek economy started the year with its best conditions in years, it is expected to be vulnerable to the demand and supply shock caused by the Covid-19 crisis, writes Dr Tasos Anastasatos, group chief economist of Eurobank and chairman of the scientific council of the Hellenic Bank Association (pictured).

This article is published alongside a Q&A with National Bank of Greece in light of the postponement of the Athens ECBC plenary.

The Greek economy entered 2020 with positive medium term prospects, being in a trajectory of economic recovery after a multi-year recession that cost more than one-quarter of the economy’s output.

In 2019, for a third year in a row, real GDP grew, by 1.9%, overshooting the Eurozone by 0.7 percentage points. In January 2020 the unemployment rate fell to 16.4% of the labour force, reaching a 106 month low (a peak of 27.5% was recorded in 2013), with employment having recovered 36% of its total losses during the crisis, based on tourism, trade, manufacturing and the public sector. In addition, inflation remained subdued (0.5% in 2019 following 0.8% in 2018), continuing to record favorable price differentials versus euro area trading partners.

At the beginning of 2020, Greek banks had also recorded substantial progress: liquidity conditions had greatly improved, with private sector deposits increasing €8.6bn, or 6.4%, in 2019 and Eurosystem funding reliance returning to normal levels (ELA eliminated since March 2019). At the same time, Greek banks had been outperforming the targets agreed with the Single Supervisory Mechanism on NPE reduction, net credit to non-financial corporations had returned to positive territory, and capital adequacy ratios exceeded those of the average euro area bank.

It is worth noting that in February 2020, the economic climate index recorded its highest value since January 2001! The reductions in the Greek Republic’s borrowing costs, upgrades and positive reviews by the international credit rating agencies, the prospects for accelerating growth in 2020 (the growth rate of the Greek economy was projected at 2.4%, according to European Commission’s winter forecasts), and the commitment of policymakers to implement measures conducive to medium term growth, with a focus on tax cuts and improvements in the institutional framework, have all played an important role in the recovery of Greece’s economic climate. It is nevertheless true that in spite of the significant progress, important risks to the long term potential growth rate remained, due to still negative net investment and adverse demographic trends.

Covid-19 to hit economy, but reforms ‘solid’

The outbreak of the Covid-19 pandemic interrupted this process. In this new context, it is impossible to make an exact forecast for the course of real GDP in Greece in 2020, due to uncertainty related to three critical factors:

● The duration of the lockdown;

● The nature and size of fiscal and monetary support measures;

● The impact on consumer and investor behavior in the post-crisis period.

In that sense, only sensitivities to different conditions can be assessed.

What can be said is that Greece is expected to prove vulnerable to the demand and supply shock caused by the Covid-19 crisis-due to a number of structural factors, including the larger exposure of Greek GDP to tourism and transports and the larger share of self-employed and micro-enterprises in the Greek labour force. Channels of transmission also include disturbances in the supply chain of manufacturing, shocks in consumer and investor confidence, and recession in the country’s major trading partners.

The Greek banks have estimated two scenarios:

In a baseline scenario – based on milder assumptions regarding the duration of the lockdown, fiscal support measures, and assuming no lasting change in consumer and investor behavior post-crisis – the consensus (the average across banks) estimate is for a recession of minus 5.6% year-on-year in 2020 and an increase in the unemployment rate to 19.7% of the labour force;

In the adverse scenario – assuming more extended (or repeated) lockdowns and lasting behavioral changes – the consensus estimate is for a recession of minus 9.9% YoY in 2020 and a gradual recovery from 2021 onwards. In this scenario, an increase of the unemployment rate to 21.2% of the labour force is expected, while recession is also expected to bring about deflationary pressures, and pressures in real estate and in NPEs. At the same time, the primary fiscal balance for 2020 will have a negative sign for the first time since 2013, in spite of the primary surplus of 4.0% of GDP recorded in 2019. This is due to the cost of the fiscal support measures put in place to cushion the negative effects of the Covid-19 outbreak and the effect of the expected recession on budget revenues. Hence, a significant negative impact is expected on 2020 public debt and gross financing needs, with the return of the debt-to-GDP ratio below 100% being pushed forward several years. It has to be noted that the availability of the cash buffer cushions financing pressures.

On the reform front, the effort continues in the context of the enhanced surveillance framework. While some reforms are progressing smoothly, the Covid-19 crisis will inevitably cause delays in both the reform and the privatisation programmes.

Overall, however, the commitment to both programmes by the current government remains solid.

In addition, it is notable that the urgency to provide certain services digitally due to the coronavirus led to the rapid adoption of digital means by both the state and companies and the quick familiarisation with them by the public.

Regarding the reform agenda, of particular interest to the banking sector is the “Hercules” programme for the reduction of NPLs and the new household insolvency framework.