The European Commission conceded on Thursday that the Greek economy proved more resilient that originally expected, but pointed out that further fiscal consolidation measures are unavoidable.
To achieve a 0,5% primary surplus in 2016 contraction, Greece must further slash public expenditure by 1,3%. The current Greek budget envisages 1,1% savings, which seems to hint that more measures will be needed this year.
The Commission also notes that Greece may have to spend more than can possibly be predicted on the management of the refugee crisis, which means further cuts may apply.
The European Commission forecasts that the Greek economy will contract by 0,7% in 2016, but labour market flexibility is expected to have a positive effect on unemployment.
The economy is expected to rebound in the second half of 2016, and in 2017 the Commission projects GDP growth by 2,7%. And such growth will be necessary because Greece must achieve a primary surplus of 1,75% in 2017. All these projections hinge, according to the European Commission, on Greece implementing the fiscal consolidation measures and stick to its privatizations program.
Better than expected
Initial estimates of 2015 GDP contraction were revised upwards for the Greek economy. It is now estimated that Greece went through zero growth in 2015, up from an original European Commission estimate of minus 1,4% in Autumn 2015.
That exceptional performance, according to the European Commission, came from stronger demand, as Greeks had in effect forecasted capital controls and were spending their money amidst negotiation uncertainty, to avoid potential haircuts. A surge in the economy also came from tourism, which did exceptionally well.
Apparently, Greece saw a surge in consumption – that eased GDP contraction – but also weak consumer demand, triggering deflations. And despite significant increases in VAT charges on basic goods, including food, there was deflationary pressure because of a drop in global energy prices.
