Return to recovery in sight, challenges still significant
The Greek economy stagnated in 2016, following a mild contraction in the previous year, with a relatively strong growth contribution from private consumption offset by negative contributions from public consumption and net exports. Meanwhile gross fixed investment had no significant impact on GDP growth. Elevated economic uncertainty in H2 2016 due to delays in the completion of the second review of the EUR86 billion ESM bailout program weighed on economic activity.
In 2017 the Greek economy is likely to return to positive growth. Yet the downside risks are still significant. In Q1 2017 GDP expanded by 0.4% q/q and short-term economic prospects should benefit from the successful conclusion of the second review in mid-June which ensures that Greece can meet upcoming debt repayments removing the risk of an imminent sovereign debt default and clear some arrears.
Domestic demand will be the key driver of economic growth supported by the recovery in business and consumer confidence and a favorable labor market trend. The return of inflation (Forecast: 1.0% in 2017 and 1.2% in 2018) and the limited ability of Greek banks to supply credit given persistently high NPLs will, however, keep a lid on growth dynamics.
Meanwhile exports are expected to benefit from the favorable global growth momentum, a still relatively weak EUR and strong demand in the tourism sector – the Greek National Tourism Organization expects a record-breaking 30 million international visitors to Greece for 2017 (+7% y/y). We expect Greek GDP to expand by 1.0% in 2017 with the pace of the recovery accelerating notably in 2018 to 2.5%. The pick-up in economic growth will be supported by the removal of the capital controls with first steps expected to be taken as early as H2 2017 contingent on the return of confidence in the Greek banking sector.