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Greece’s economic recovery continues at a decent pace, regardless of escalating signals of a slowdown coming from peer Eurozone countries. The combined apparent effect of an exit from the third European Stability Mechanism (ESM) programme and the positive effect of the recovery on employment have been supporting consumer confidence, which posted a relative high last December. Unsurprisingly, confidence in retail held up decently well as did confidence in service sectors, backed by a strong performance from the tourism sector. On the contrary, confidence in the export-related manufacturing sector has fallen sharply since last August, reflecting an ongoing deterioration of the international background.
In the third quarter of 2018, the seasonal and calendar adjusted Greek GDP expanded by a healthy 1% quarter on quarter. Data showed that the economic growth was driven by gross fixed capital formation and by inventory accumulation, with private consumption providing a minor push. The side effect was a sharp gain of imports, with net exports acting as a drag as a consequence. In addition to, according to the Hellenic Statistical Authority, employment continued to expand at a healthy 1.7% during the third quarter of 2018, helping to support disposable income. Interestingly, the concurrent decline in the unemployment rate to 18.6% happened when the labour force was expanding; undoubtedly a positive signal.
Mildly expansionary budget
The acceleration in economic growth has had as a positive side-effect with further progresses on public account data. State budget execution data for the January-November 2018 period suggests that Greece should have been able to overshoot its general government budget primary surplus target of 3.5% of GDP for the third year in a row, getting close to a 4% primary surplus in 2018. Such a positive fiscal performance, mainly driven by a significant reduction in primary spending, allowed Greece to approve a budget for 2019 including a set of expansionary measures worth 0.5% of GDP. These will be funded by the recurring element of the fiscal over performance recorded in the 2016-18 period, while enabling Greece to cancel the implementation of pension cuts that were scheduled for 2019.
As expected, the exit from the third programme has not allowed Greece to immediately regain full control of its state finances. Fiscal and reform constraints remain in place under the enhanced surveillance regime, with the medium-term debt relief measures agreed conditional on them. However, the first fiscal expansion in a decade, marks at least a symbolic break with an unparalleled fiscal adjustment. Prime Minister (PM) Tsipras, having had his budget smoothly validated by the EU Commission, passed his first post-programme credibility test without incident, obtaining an asset that he could leverage upon in a politically dense year.
Politically Dense Year
The European Parliament election vote in May and legislative elections, due no later than 20 October, make 2019 a politically dense year. The Prespes Agreement reached between Greece and FYROM (Former Yugoslavian Republic of Macedonia) to change the name of Greece's neighbour to Republic of North Macedonia raised some issues when Panos Kammenos, the junior partner in Greece’s government alliance, disagreed with the agreement and quit the government. PM Tsipras subsequently decided to call for a confidence vote in the government, which was held on Wednesday, 16 January. The vote was passed with 151 votes in favour and 148 against out of 300. After the vote, Tsipras repeated that his government would remain in power until the end of the current legislature, at the end of October. Given the situation, the latter cannot be taken for granted as the PM might be tempted to have an election before then. In between, the PM will soon have to reassure lenders in their second post-programme review that his government is still empowered to fulfil its list of changes; far from being an easy attempt.
In a nutshell
Domestic demand is now taking the token of growth as the external background deteriorates. Ongoing employment recovery represents a short-term hedge, helped by the first mildly expansionary budget in a decade but beware upcoming elections.
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